கவனிக்க: இந்த மின்னூலைத் தனிப்பட்ட வாசிப்பு, உசாத்துணைத் தேவைகளுக்கு மட்டுமே பயன்படுத்தலாம். வேறு பயன்பாடுகளுக்கு ஆசிரியரின்/பதிப்புரிமையாளரின் அனுமதி பெறப்பட வேண்டும்.
இது கூகிள் எழுத்துணரியால் தானியக்கமாக உருவாக்கப்பட்ட கோப்பு. இந்த மின்னூல் மெய்ப்புப் பார்க்கப்படவில்லை.
இந்தப் படைப்பின் நூலகப் பக்கத்தினை பார்வையிட பின்வரும் இணைப்புக்குச் செல்லவும்: Economic Review 2011.04-05

Page 1
April/May 2011
***** ■ * -
*
 


Page 2
This issue of the Economic Review on Banking Industry' is specially published with increased number of pages (53), to commemorate the People's Bank's 50th anniversary due to be held on 1 July, 2011.
In the mid 20th century, banking service was restricted only to elites who were a very small fraction of the society. The disadvantaged people, particularly those living in rural areas, who representa large majority of population of the country, were deprived of it.
The People's Bank was established in 1961, after a series of deliberations at various levels over a period offew decades to create a proper banking system to cater to the banking requirements of the rural people in particular and to obtain their contributions towards the development of the country. Its main objectives were: (i) to develop the co-operative movement; (ii) to strengthen rural banking; and (iii) to provide agricultural Credits.
Having achieved its original objectives, and going beyond further, the bank has rapidly expanded its services at present to cater to all banking requirements of different sections of the society. Becoming the most popular bank of the common man, presently, it directly serves 12.8 million customers (more than half of the population of the country) through its 687 branches /service centres (the largest bank branch network that covers every corner of the country) while its products and other programmes indirectly serve almost all the population of the соитtry.
The bank, in its initial decades, strengthened the cooperative rural bank system and the co-operative movement of the country. It promoted saving habits of the nation, recording the highest deposit base of the banks in the country in the recent past. It contributed to increase national investment and production over the years by granting a large sum of loans and advances under a variety of loan schemes implemented covering all activities of the economy. The bank also supported successive governments as well as hundreds of thousands of пеedy people by providing various special financial supports with very easy terms and conditions in areas such as poverty
 

alleviation, disaster recovery (i.e. Tsunami), self employment, etc.
At present, the People's Bank, while performing at the highest in many aspects of the banking industry in the country, provides a variety of services to the nation, ranging from primary banking services rendered to the illiterate sections in disadvantaged pockets of the society to technologically-advanced sophisticated products offered to affordable customers. Further, deviating from operational nature of most of its counterparts, the People's Bank plays a very significant role in promoting earning capacity, and thereby, living standards of low-income earners- the majority of the population of the country- by utilising a large share of its funds, staff and efforts to provide them with commercial banking services at a very low or zero profit margin.
Publication of the Economic Review journal, one of the main Corporate Social Responsibility (CSR) products of the bank, was started in 1975, as a contribution to Research and Development (R&D). By publishing about 275 journal issues with separate comprehensive special reports on various important development issues prepared by specialists and a large number of feature articles on other related disciplines authored by relevant experts, the journal has been making a unique contribution towards social and economic development of the country and the World as a whole.
At this occasion of the 50 anniversary of the People's Bank, the Economic Review connenorates with a great respect the founders of the bank who contributed their knowledge, creativities, abilities and energies to create such a useful and successful banking establishment for the well-being of the nation. The journal also uses this occasion to gratefully acknowledge the cooperation extended by its customers and the employees to bring the bank up to the present position of its successful journey. The present staff of the journal also wishes to take this opportunity to express its sincere gratitude to the pioneers as well as authors, readers and other supporters of the journal for their contributions to the success of the journal.

Page 3
Published by
Research Department
People's Bank, Head Office Sir Chittanpalam A.
Cardiner MaWatha,
Colombo 02. Sri Lanka
ADVISORYBOARD
WA. Karunajeevwa
Chairman People's Bank
N. Vasantha Kumar
CEO/ General Manager People's Bank
K. U. Pushpakumara Director Research People's Bank
CONSULTANTEDOR
Dr. A. P. Keerthipala
CO-ORDINATOR
H. L. Hemachandra Research Officer
E E ECONOMIC REVEVV S. intended o promote Knowledge and interest in the economy and economic development process by a many sided presentation of VievNS and reportage, facts and debates. HE ECONOMIG REVIEW is a community Ser Vice project of the People's Bank. Its contents however are the result of the editorial considerations only and do not necessarily refect Ean POficies o le oficia Viewpoint. Signed feature articles also are the personal ViievVVS of the anos ano not represent the institutions to Which they are attached Similar contributions as We ES Come S en VeV
points are Welcome. THE ECONOMIC REVIEW is published bi-monthly and is a Vaabe on on
Dr. Muttukrishna S
Prof. Sirimevan Colo
H.M.S. P. Herath
Prof. Sirimevan Colo
Dr.W.M. Hennachanic
Wipul Jayawickrama
Dr. Wickrema Weer
Kanesh Suresh Jeyapraba Suresh
Dr. Upalinie Ajitha
Subcription and om direct sale. E-maile Corte VG2 peoples bank.K
Primité
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

April/May 2011
C O N T E N T S
Feature
arvananthan 44 Fiscal Devolution: A stepping Stone
Towards Conflict Resolution in Sri Lanka
mbage 49 Agriculture and Rural Development in Sri Lanka: A Felicitation Volume in Honour of Dr.S.M.P. Senanayake
를
Special Report
Banking industry e Aspects of Current importance
O3 Microfinance and Commercial
Banking
mbage 08 Electronic Banking in Sri Lanka:
Prospects and Constraints.
lra 13 Financial Crisis and Their lessons
3. 21. The Role of Information Risk
Management in Combating Global Money Laundering and Terrorism Financing
“asooria 24 Development of Banking Law in Sri
Lanka: A Critical Assessment
29 Banking Services in Post-conflict Development of the North and East of Sri Lanka
Ten nakOOn 36 The Role of State banks in the Sri
Lanka Economy with Special Reference to the People's Bank
Net issue
New World Order
'd at People's Bank, Printing Services Dept.

Page 4
HIGHILIGHTS OF B.
SRI L
Distribution of Banks and Bank Branches
Category End 2010 (a Licensed Commercial Banks (LCBs) i. Total No. of LCBs 22
Domestic Banks Foreign Banks ii.Total No. of LCB Branches and other Outlets 5,119 Branches 1,432 Domestic Bank Branches 1,386 Foreign Bank Branches 46 Extension Offices 898 Domestic Banks 723 Foreign Banks 170 Student Saving Units and other Outlets 2,789 Automated Teller Machines 1848
Licensed Specialized Banks (LSBs)
i. Total No. of LSBs 9 Regional Development Banks
National Savings Bank 2 Long-term Lending Institutions 2 Housing Finance Institutions 2 Private Savings and Development Banks 2 ii. Total No. of LSB Branches and other Outlets 7SS Branches 5OO Regional Development Banks 230 National Savings Bank 173 Long-term Lending Institutions 23 Housing Finance Institutions 28 Private Savings and Development Banks 46 Extension Offices 67 Student Saving Units and other Outlets 88 Automated Teller Machines 158 Total No. of Bank Branches and other Outlets 5,874
Sources of Funds of Banking Sector Uses of Funds 70;၃၀...ဃဿဿယာဿဃာ့ ت۔ ۔۔۔۔۔ 80 ------- - - リ ཕྱི70 -་ཤ9.8...69.5་ར༦9.6་”74:T་ 729|་ཚུ60 ཁམས་པ་ 毒60 ప50 主 50- 40 器 40. - ܫ• ܀ - - - ܀ -• VM MMMMM MMM M ်=30' ---. v. -- 1 - 1 - N11 M1 .K. K. MW Y M . M M 30 ' ' " | -്.19" 20 --- 129-1- 20, 16". 10 -98.8 cities 3 2'. 15 * ರಿಯಾಜ್ಞೆ" ಕ್ಲಿ೨ ಸ್ಥಿತಿ" "ಸ್ಥಿತಿ | 0 2006 2007
- Deposits --- Borrowings - Capital Funds - Others DonnaionulumLoams ********
Non-Performi
Percentage Distribution of Loans and Advances of
the Ba
Commercial Banks by Purpose (2009)
100
Other Loans, 6.3%
`SYMrTrading, 25.7% 7. "
6 * వ° ------ Financial, 4% 3༧༦༠་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་་ :
2 ----- ------ ܀- ܗܝܐܗܝ Agricultural, 10.8% 1 చ.ళ్లు.ళ్లయింx 0.
2006, 2006 2007 Tourism, 3.4% dustria, 10,1% iš GroşşNPIL Volume
Rs. billion) r re. ; - Source of Domestic Financing of Budget Number of Automatec Operated by C 250 m Bank 雷娜 S. 200 Non Bank 速 O sess: Automated Telle 年150 3 8 as ATMs(përToo.c 2 圭 6
5
శ్రీ
柔
*ඳ
50 :
0 &&... . . ....soss 2
s 8 ・ O
-50 2008 2009 2010(a) 2002, 2003 2004 2005 2. {a) Provisional (b) Data available only in 2009 & 2010 Source: Sa
 
 
 
 
 
 
 
 
 
 
 
 
 

ANKING NIDUSTRY
k
Expansion of Commercial Banks and No. of Commercial Ban a) Branches per 100,000 Persons (Banking Density)
... . . ン・・。 LLLELLaaLJLLL0aLLLLELEJSLLLLLLaLSLLLELJJESJLLJJLaLLEL ・・・ニーニ・・・ニューン・ベー・ン・・・ヘー・・・・ ー w ར་མ་16
__ శీ
ܐܡܪ 霆二 -
的C sسیستس۔
ー| ○ _|乙
f གང་ V) > * 5 xܒܚܣܕ g ge ges K ܚ
ge g Kd &= Kx
KN x en 一、
ea Domestic Foreign umum No. of commercial bank branches
Banks Banks (per 100,000 persons)
--- Banking Density by District
ー川 。
H 30
25 تا "I లా 一排é
ご 20 as sed - 15
g 10 

Page 5
Microfinance
Abstract
is paper examines the link
betuveen microfinance and
commercial banks. At the initial
Stage of evolving microfinance,
connercial banks uere not much
interested in financing for the poor of developing countries, allouing other microfinance institutions to explore theiruvork in this sector. Higher risk, higher transaction cost and socio
economic issues uere the main
reasons for lesser attention on microfinance activities. Housever, uith increased competition in traditional
market, commercial banks are
gradually expanding their banking operations to the microfinance market, and this has supported to link formal and informal financial markets of
developing Countries.
Introduction
Microfinance refers to the provision of financial services to poor and
low-income households. These
financial services include loans,
deposits, payment services, money transfers and insurance to people
who are unable to access
commercial banks and lacking of
banking practices.
According to Mosley (2000), as quoted by Chandradasa (Dec 2004/
Jan 2005),
microfinance often includes both
the definition of
financial and social intermediation.
Some scholars, therefore, name
these programs as “credit plus
approaches. According to Chandradasa (undated), the micro
finance is not simply banking, but
- Economic Review: April/May 2011
and Co
a “development
includes;
i. Small loans typically working
ii. Informal appra and investments,
iii. Collateral sub
group guarantee savings,
iv. Access to re loans, based
performance st disbursement anc
v. Secure saving
In developing coul of sources, name
formal and infor
provide micro-fin poor or low-inco
Rural banks and
the major players
in the formal sect
commercialisation
activities, develop
commercial bank
sector have bee
involved in m
developing ecor
source includ
institutions, s
government orga. which are offering for the poor
Inf
include money
economies.
shopkeepers, trac
Significance of
The provision
generation of sa been recognise

ommercial Banking
tool", because it
(micro-credit), capital,
isal of borrowers
ostitutes, such as s or compulsory
peat and larger on repayment reanlined loan l monitoring, and
products.
ntries, three types ly, formal, semi
mal institutions
ance services for
ine households.
cooperatives are
s of microfinance
or. However, with
of microfinance
inent banks and
ks in the formal
en increasingly
of
nomies. Second
.icrofinance
es semiformal
, u ch a s
nisations (NGOs)
financial services
O
of developing
ormal sources
lenders and
ilers, etc.
Microfinance
of credit and
vings have long d as essential
H.M.S.P. Herath
Head, Department of Banking card Finance Faculty of Business Studies and Finance, Wayamba University of Sri Lanka, Kuligapitiya.
elements in any rural development strategy. The credit can play a crucial role in the modernisation of agriculture, but its role in the fight against rural poverty has seldom been recognised. Especially when addressing the issue of lack of capital for promoting agricultural enterprises and for up-lifting the social capital of the rural economy, the role of formal financial institutions, i.e., state or privatelyowned commercial banking system is very much important. Those institutions can fulfil financial needs of the rural poor even by a way of granting credit facilities to improve their harvest or their businesses concerned. But, there is an allegation that even though those institutions are mobilising more and more rural savings, the provision of credit facilities to rural sector is very low. The rural poor men and women, landless, agricultural labourers and small fishermen have almost been
excluded from these financial
services either because they were not available (collateral and procedural requirements rendered to them inaccessible) or simply because they were not considered creditworthy. According to Karmakar (1999), the erroneous view is that the poor do not have any resources, do not save, that they cannot
immediate
3
invest in view of

Page 6
Consumption needs, and that they are ignorant of the basic principles of sound money management. In the competition for a small quantum of financial resources, the poor naturally lost out in the institutional markets and were constrained to resort to exploitative informal sources of financing such as money lenders and traders. Further, rural financial services have mostly been controlled by rich farmers, who are able to use their large endowment base and influence within the local power structure to secure loans at very advantageous terms. As a result, this informal financial sector was playing a crucial role in meeting the credit needs of the rural poor than the formal sector institutions. This informal financial sector was able to respond quickly and with great flexibility to press demands, and exploit the poor and further compound their poverty since the credit was provided at exorbitantly high rates of interest. According to Qureshi et al. (1996) as quoted by (2003), the
importance of this money lending
Karunan ayake
has tended to decline in countries of South Asia in the wake of postindependence development
initiatives.
As a result of suffering from both
formal and informal unfair treatments by these rural poor, many national rural development programs in the form of integrated efforts or cooperatives have endeavoured to increase the availability of financial services, reduce collateral or other requirements, and adapt lenient procedures to rural clients. Even though such credit cooperatives are widespread in South-Asian
countries, the principle of open
membership cau cooperatives to ( control of well
farmers and have f
contribution in t.
poverty in the Therefore, the b cooperative ins frequently been c the interests of
From the world e the rural economy served by for institutions, at the 1950s, many deve began to introduce programs target communities to fu
financial needs of
These subsidised rarely successf
th
specially establish
institutions
programs suc Development B massive erosion
base due to sub
rates and poor rep of the rural peop time, the devotec always reach
beneficiaries, an
ended up in the h
farmers (CGAP, 2
As a result, experimental Bangladesh, Braz. countries exten
(micro-loans/cre
poor women to businesses throl
Because, durin markets and gove provide financia poor, and late1 accepted to s
accomplish this
4.

ed most of the
one under the
o-do powerful illed to make any e alleviation of
rural sector.
nefits of these
itutions have
verted to serve
a selected few.
perience, since was not properly mal financial
beginning of the opment projects subsidised credit
ing at specific fil the un-served
the rural poor. schemes were
ul.
at
ned under these
h
anks suffered
Also, some
have been
aS Rural
of their capital sidised lending ayment discipline le. At the same
funds did not
the
i instead, often
ands of better-off
intended
)03).
in the 1970s,
programs in
land a few other
ded tiny loans lit) to groups of
invest in micro
gh some NGOs.
that time, the
rnments failed to
services to the
it was widely
lect NGOs to
ask. This type of
micro-enterprise based credit was disbursed as solidarity group lending system in which every member of a group guaranteed the repayment of all members. Here, there are several factors, which have led to increased interest in micro-credit in promoting growth with greater equity. There has been a growth in the recognition of the importance of empowering all people by increasing their access to all factors of production, including credit. This enabled them to
accumulate assets and raise
household income and welfare. As a result, the value of the role of NGOs in development was received more attention. During the 1990s, many of these institutions transformed themselves into
formal financial institutions to access and on-lend client savings, thus enhancing their outreach. Later, these institutions were given a specific name called Microfinance Institutions (MFIs).
Microfinance Institutions
(MFIs)
A microfinance institution (MFI) is an organisation that provides financial services to the poor. This, a very broad definition, includes a wide range of providers that vary in their legal structure, mission, methodology, and sustainability. However, all share the connon characteristic of providing financial services to clientele who are poor than
clients.
vulnerable
bank's Historical context can help explain how specialised MFIs developed
and more traditional
over the last few decades. According to CGAP (2003), it is estimated that there are about three thousand MFIs in developing countries. These institutions also help create
and more
deeper widespread
Economic Review: April/May 2011

Page 7
in those countries. These MFIs can be
financial markets
formal, semi-formal or informal service providers.
Formal providers are those that are subjected, not only to general laws, but also to specific banking regulation and supervision (e.g., development banks, savings and postal banks, commercial banks, and non-bank financial intermediaries). Formal providers may also be any registered legal organisations offering any kind of financial service. Semi-formal providers are registered entities subjected to general and commercial laws, but are not usually
bank
supervision (e.g., Financial NGOs,
under regulation and
Credit Unions and Cooperatives).
Informal providers are nonregistered groups such as rotating savings and credit associations and
self-help groups.
According to ownership structure, MFIs can be government-owned, like the rural credit cooperatives in China; member-owned, like the credit unions in West Africa; socially minded shareholders, like many transformed NGOs in Latin America; and profit-maximising shareholders, like the micro-finance banks in Eastern Europe.
The focus of some providers is exclusively on financial services to the poor. Others are focused on financial services in general, offering a wide range of financial services for different markets. Organisations providing financial services to the poor may also provide These services can include business
non-financial services.
development services, like training and technical assistance, or social
like health empowerment training.
services, and
- Economic Review: April/May 2011
Poor people neec same types of fir everyone else.
known service is
“micro-loans," de range of group-ba methodologies, services offere
those adapted to the poor, suc insurance, and
types of services by what is allow structure of the p regulated insti generally allow
savings or insure
The biggest challe ensuring the fina the poorest st
households and
(i.e., loan amoul capita income) viability of MFI survival and sus
According to Ha following measu evaluate MFIs 1
impact of ni
beneficiaries:
i. Profitability o
ii. Loans disburs
iii. Savings Mobi
iv. Loan repayme
v. Average loan
vi. No. of borrow
vii. No. of Savers
viii. Staff produ of loans/savings
ix. No. of repeat
x. Proportion of

and demand the
ancial services as
The nost vell
non-collateralised
livered through a sed and individual
The menu of
| also includes
specific needs of h as savings, emittances. The
ffered are linited
ved by the legal rovider, i.e., non
utions are not red to provide
CC.
nges for MFIs are
uncial services to.
2gment of the their enterprises nt less than per and financial itself for their
tainable growth. rper (2003), the res are used to
o measure the
crofinance on
the MFI
ised
nt rate
size
es
ctivity (Volume per employee)
borrowers
women clients
xi. No. of clients who know they belong to groups which are poor, such as people are living in a particular areas, ΟΥ belong to particular tribes
who
xii. Regularity of attendance at grOup meetings
xiii Changes in clients' assets
xiv. Changes in clients' income
xv. Improvements in clients'
family nutrition
xvi. Improvements in education and school attendance and,
xvii. Changes in client empowerment
Commercial Banks in Microfinance
Commercial banks offer an array of deposit accounts, checka ble deposits and time deposits. Also,
including deposits, savings
banks provide range of loans products to their customers like, personal loans, housing loans, business loans, etc.
At the initial phase of evolving microfinance, commercial banks have not shown their interest on microfinance activities, as they have believed that microfinance as al un profitable option.
Microfinance experts have identified three basic reasons for the absence of microfinance activities in commercial banks in the past. Perception of high risk and high
microfinance transactions and
cost associated with
socio-economic and cultural barriers were the main reasons for non-involvement of commercial banks in microfinance transactions. Traditional bankers perceived that micro-enterprises as bad credit risk. Non-availability and lack of
5

Page 8
collateral to guarantee demand for borrowings of micro-entrepreneurs was a major reason which discouraged commercial bankers for not involving in microfinance activities. Also, they perceived that micro-enterprises of the poor as unstable and unfeasible business which may make disable repayment
of low-income groups' borrowings.
Also high cost associated with small loans was another reason which discouraged commercial banks to involve in microfinance. Transaction cost associated with finance activities is assumed to be decreased with the increase of loan size of borrowers. However, as micro credits are in small amounts and their maturity periods are shorter, transaction costs in micro credits were relatively high as compared to traditional loans of commercial banks, and this was another major reason for these
banks to deviate from microfinance
activities.
In addition, socio-economic and cultural barriers were another factor to depart banks from microfinance activities. Lack of education is a common issue for people who are living in low-income countries. As a result, they do not possess business records that can show their business feasibility. Also,
developing countries have some
the se poor people in
cultural and language barriers to adapt to modern banking sector.
However, by today, the situation considerably changed.
banks
increasingly been involved in
has
Commercial have
financial transactions with lowincome people. With increased
competition in banking sector,
commercial bank major issue of market share transactions, th decrease their Therefore, the i. given on microfir commercial ban CGAP (Consult Assist Poor) has billion potentia microfinance ma.
commercial bank
financial institu
microfinance developing col participation of c in microfinance a significantly incI last decade.
With high compe microfinance acti
identified that c use six approaс microfinance m Porteous, undate a microfinance
(direct approacl microfinance p:
approach).
In direct appro banks use three
enter microfina
include either o
microfinance ur
financial ins
microfinance se
Conner clai . different ways iı to microfinance outsourcing re providing eithe: or infrastructu
MFS.
Goodwin (1998
following factor
6

are now facing a ecreasing their in financial reby causing to profit margin. terest has been
ince activities by s. For example, ative Group to dentified up to 3 clients in the
ket and over 225
and other formal ions engaged in activities in Lntries. Hence, ommercial banks
ctivities has been
eased during the
Litive advanuage in vities, it has been onnercial banks
ches to enter the arket (Isern and d) through either service company h) or the existing
oviders (indirect
ach, commercial
different ways to nce market. They pening an internal it or a specialised titution
Ο Ι al
vice company.
alkS U See thre Ee indirect approach market. They ae ail operations or commercial loans
e and systems to
has identified the
for the success of
commercial banks involverment in
microfinance activities:
(i)
bank or a separated microfinance
Creating a small specialised
unit within a large commercial bank
(ii) Treating savings as equally important to lending
(iii) Charging interest rates to cover
all the costs of the lending products
(iv) Ensuring excellent Management Information System (MIS) and
portfolio management
(v) Recruiting stait trom outsude the banks and/or give staff specialised
training
(vi) Finding a champion or visionary who will see the program through
to success
Microfinance and Commercial Banking in Sri Lanka
In Sri Lanka, various microtanance practitioners have been engaged
the
Commercial banks, Development
O Ver last few decades.
banks, Finance companies, Public Co
operatives, Co-operative Rural Banks (CRBs) and NGO-MFIs have
the
welfare organisations,
been key-players in microfinance of Sri Lanka. People's Bank, Bank of Ceylon and Hatton National Bank which offer various microfinance loans for poor people are the well-known commercial banks involved in microfinance of the country. Among development banks, Regional Development Bank and Sanasa Development Bank have been playing a vital role in microfinance market to meet the demand for financial transactions
of poor people.
Economic Review: April/May 2011

Page 9
Among commercial banks in the country, the People's Bank, a
State-owned bank and the second
largest bank in Sri Lanka, provides access to financial services for the
households.
rural and poor
Currently, it offers different
microfinance loan schemes for
small and medium agricultural entrepreneurs, agro-based industries, self employment, cottage industry, trade and services for more than 25 percent of household in the country. The People's Bank grants micro finance loans for starting, improving or expanding business of the poor. When the maximum loans amounts
are considered, it shows a clear indication of commercialising
microfinance activities in the
country. For example, the People's bank provides a maximum amount of Rs. 250,000 for micro enterprises with only two personnel guarantees.
Also maximum loan amounts for
small and medium entrepreneurs
are Rs. 2 million and Rs. 20 million respectively. Also, Bank of Ceylon (BoC) and Hatton National Bank (HNB) are the other key commercial banks in the country which have been engaged in microfinance for a long period of time. They are granting microfinance loans for agriculture, fisheries, selfemployment, etc. Those two banks also grant loans with a maximum loan size of 1 million for microenterprises to fulfil their financial
requirements.
Conclusion
There are various types and a large
number of institutions and
programs to finance and help promote micro-enterprises among the Hence,
poor people.
microfinance ha
tool in poverty a
low-income hol
initial stage
commercial ban
microfinance as a
High cost of bot
transactions was
that discouraged
to enter the mar
increased com
formal financial i
traditional mar
banks have sho
interest to enter
market using di
approaches 1
microfinance in
approach, comm the market by s unit or specialis
addition to that,
approach to ent channelling fu) microfinance p
market. This hi
number of cor serving for finan poor people. Lar and supply of crec
an interest are
which show con
microfinance
involvement of co.
microfinance
accelerated the
formal and ind
markets in devel
References:
Chandradasa," A 2004 / January MicrofinanceP, E People's Bank, C.
Consultative Grc
(CGAP). (2003). Questions, Retrie
- Economic Review: April/May 2011

S become a vital
leviation of these
seholds. At the
of evolution, ks had perceived non-profit option.
h credit risk and
the main reasons
commercial banks
ket. However, with petition among nstitutions for the
ket, commercial
wn an increased
the microfinance
rect and indirect
the
larket. In direct
O enter
ercial banks enter starting a special ed institution. In
oanks use indirect er the market by nds via existing
providers in the
as increased the
nmercial banks
lcial needs of the
ger size of credits lit for the poor with
some indicators
mercialisation of
The
mmercial banks in
activities.
activities has
amalgamation of
ormal financial
oping countries.
.J.M. (December
2005). What is conomic Review, olombo, Sri Lanka.
up to Assist Poor Frequently Asked ved on August 8",
2005, Available from http://
www.cgap.org.
Goodwin R. (1998). The Role of Commercial Banks in Microfinance: Asia Pacific
Harper, M. (2003). Practical Microfinance: A Training Guide for South Asia, Vistaar Publications, New Delhi.
Isern, J. and Porteous, P. Commercial Banks and Microfinance: Evolving Models of Success, Karnakar, K.G. (1999). Rural Credit and Self-help Groups: Micro-finance Needs and Concepts in India, Sage Publications, New Delhi.
Karunanayake, M.M. (Ed.). (2003). Rural-Urban Interface in Sri Lanka, Studies in Regional Development, Department of Geography, University of Sri Jayewardenepura, Sida/SAREC Research Cooperation
Project, p. 15.
Mosley, Paul. (2001). Micro-finance and Poverty in Bolivia, The Journal of Development Studies, 37(4), London.
Querishi, S., Ilaz Nabi, & Rashid, Faruquee. (1996). Rural Finance for Grouth and Poverty Alleviation in Pakistan, Agriculture and Natural Resources Division, World Bank, South Asia Region.
Wattegama, W.G.E.J. (2007). The Role of Micro-Finance Institutions in the Rural Development Strategy, Accountancy Journal, Department of Accountancy and Business Finance, Wayamba University of Sri Lanka, Kuliyapitiya, Vol 5, ISSN 1800-2382.
Footnote:
E-mail: shanGwyb.ac.lk

Page 10
Electronic
Bankin
Prospects and Const
Introduction
n the background of the
unprecedented innovations of
Information and Communication Technology (ICT) coupled with the liberalisation of the financial sector and the global financial integration, electronic applications are emerging in many spheres in the financial markets. These include e-banking, e-money, e-finance, e-brokering, e-insurance, e-remittances, e-fund transfers, and e-exchanges. Electronic banking (e-banking) is the latest delivery mode of banking services. Broadly, e-banking can be defined as an electronic connection between a bank and a customer that facilitates to prepare, manage and control a financial transaction. Electronic banking is offered on different platforms, including internet banking (or online banking), telephone banking, mobile phone banking (or mbanking), mobile money (or mmoney), TV-based baking and PC banking (or offline banking). The degree of adoption of each of these channels varies from country to country. For example, m-banking is very popular in Kenya as against a country such as Sri Lanka.
The objective of analyse the constraints for th e-banking in S analysis is bas collected by the a study under : research project w of California, US 2010. This study the lack of data ol Lanka despite adoption of e-bar are essential fo purposes as well of the industry. paper is organi Section 2 provide the expansion of communication te 3 examines the in the country. S the potential for n Concluding remar final section.
The Expansion and Communica
In common wi developing countil experienced a ph in telecommun during the la particular, the ex
Table 1: Telecommunication Services in Sri Lanka fro!
2OOO 2001 2002
Fixed Access Services
Subcriber Base ('000) 767 829 883 Fixed Access Services ("000) 653 708 769 Wireless Access Services (OOO) 114 121 114 Telephones per 1,000 persons 4.4 4.7
Other Services
Mobile Phones ("000) 43O 668 932 Mobile Phones per 100 persons 4 5 7 Public pay Phone Booths 8,222 7,281 6,68. E-mail and Internet subscribers 40,497 61,53270,082
Sri Lanka Telecom Ltd. Central Bank of Sri Lanka
Sources :

in
raints
this paper is to
}rospects and e development of ri Lanka. The
ed on the data thor from a field collaborative ith the University A during 2009/ was motivated by e-banking in Sri the widespread king. These data policy making as for promotion
The rest of the sed as follows: es an overview of
information and chnology. Section use of e-banking ection 4 explores n-money systems. ks are given in the
of Information tion Technology
th many other ies, Sri Lanka has enomenal growth ication services st decade. In pansion of the use
in 2000 to 2009
Sri Lanka:
Prof. Sirimevan Colombage
Senior Professor, Open University of Sri Lanka.
of mobile phones has been remarkable. As shown in Table 1, the number of mobile phones in use rose from 430,000 in 2001 to almost 14 million by 2009. This implies that every 68 persons out of 100 persons have a mobile phone. Thus, there is tremen dous potential to popularise mobile banking in Sri Lanka.
Our survey data on the availability of information and communication equipment in the households also reflect the country's enormous capacity to adopt mobile banking even among the poor. Basic amenities, such as, electricity, radio and televisions are commonly available among a majority of households across different income groups, as shown in Table2. Electricity supply is available to around 93 percent of the total number of households. Around 61 percent of the surveyed households have fixed phones and 71 percent have mobile phones. This means that every 3 out of 5 households
2003 2004 2005 2006 2007 2008 2009
934 991 1,244 1884 2,742 3,446 3,431 818 86O 919 910 932 934 871 116 131 325 974 1,810 2,513 2,560 4.9 5. 6.3 9.5 13.7 17.1 16.8
1,393 2,211 3,362 5,412 7,983 11,083 13,950 12 15 17 27 40 55 68 6,440 6,095 6,285. 7,561 8,526 7,417 7,936 85,500 93,300115,000 130,000202,348234,000|240,000
Economic Review: April/May 2011

Page 11
have a mobile phone. It is significant to note that around 50 percent of poor households including the ultra-poor have mobile phones. The expansion of telecommunication networks by competing firms has led to a phenomenal growth in mobile phone usage. Household ownership of other equipment, such as, computers, email and internet facilities also showed a significant growth in recent years. Overall, around 13 percent of the households have desktop computers, and 6 percent of then have laptops. However, the ultrapoor households do not possess any computers or related equipment. Access to enail and internet facilities is also largely confined to the non-poor and moderately-poor groups.
The Use of Electronic Banking
In tandem with the growth of Information and Communication Technology (ICT) and the related ebanking facilities, the use of electronic banking (e-banking) facilities, such as, credit and debit cards, internet banking and phone banking, has emerged in Sri Lanka in recent years. As shown in Table3, internet banking, which accounts for about 5 percent of total retail payments in 2009, has surfaced as the most prominent electronic payment system. The use of phone banking is only 0.1 percent. The shares of credit cards and debit cards are 1.3 percent and 0.2 percent, respectively. Thus, the use
Table 2: Ov
equi
Item
Electricity
Radio
Television Land phone Mobile phone
Fax machine Desktop compu Laptop Compute Computer print
CD drive
Scanner
Email
Internet
Source: Househ 2008/2
of e-banking is stage in Sri Lank continue to rem non-cash paymen for nearly 90 pe value of non-cash
country.
Commercial bal banks and sex
financial inst introduced a var in recent times. (virtual) banking such as balanc
status, stop payments, inwarc fund transfers.
CLSO16IS Carl é anywhere in the phones. The telephones is rapi Lanka, and mos banking servic accessed through
Table 3: Modes of non-cash payments in Sri Lan
Composition of Values of Non-Cash Payment Syst
Payment system 2002 Main Cheque Clearing System 62.5 . Rupee Draft Clearing System Sri Lanka Interbank Payment System 34.2 Credit Cards O.5 Debit Cards O.6 Internet Banking 1.5 Phone Banking 0.8 Postal Instruments Total OO.O
Source: Central Bank of Sri Lanka
- Economic Review: April/May 2011

ership of information and communication pment (% of households) in Sri Lanka (n=859)
Moderate Ultra
Non-poor poor poor All 95.9 86.3 83.3 92.9 89.O 76.0 77. 85.2 94.1 82.4 72.9 9 O. 66.2 48.0 56.3 61.4 78.6 53.9 47.9 71.O 7.7 5.4 O.O. 6.8 te 16.3 7.8 O.O 13.4 6.8 3.9 O.O 5.7 er 8.4 5.9 O.O 7.3 19.4 11.8 O.O 16.5 7.1 4.4 O.O 6.1 7.1 4.9 2. 6.3 8.6 4.4 O.O 7.1
old Survey on E-Money conducted by the author,
OO9
still at an early ca. Bank cheques ain as the main t mode accounting rcent of the total payments in the
nks, specialised -
veral non-bank .itutions have iety of e-facilities Online internet includes facilities e inquiry, check payments, bill i remittances and Internet banking also access from world on nobile u se of mobile idly growing in Sri it of the internet es can now be mobile phones.
While the country has been enjoying an exceptionally high (traditionally-measured) literacy rate among developing countries, its computer literacy rate also has risen to about 40 percent by now. As shown in Table 4, nearly 70 percent of the households have some knowledge, about ATM (Automatic Teller Machines), and 37 percent of them have knowledge about internet banking. Knowledge about phone banking is limited to about 17 percent of the households and SMS banking to about 12 percent of them. As regards, eremittances, the moderate and ultra-poor have more knowledge relatively to the non-poor. This can be attributed to the fact that a larger proportion of migrant workers are mainly from the poorer segments of the population, and they have acquired knowledge about
ka from 2001 to 2009
ems (%)
2003 2004 2005 2006 2007 2008 2009
4.4 95.0 94.3 92.1 90.3 89.9 87.7 O.2 O.2 0.1 O.O O.O O.O 83.7 1.9 2.4 2.9 3.7 4.5 5.6 2.O 1. 1.2 3 1.4 1.4 1.3 2.8 O.O. O.O O.O O.1 O. 1 O.2 6.9 1.3 .4 2.4 4.2 3.8 4.9 O.2 O.2 O.1 O.8 O.O O. 0.1 0.4 O.3 O.3 O.2 O.2 O.2 10O.O 100.0 100.0 100.0 100.0 lOO.O. 100.0

Page 12
e-remittances. But, the usage of such facilities is limited to nonpoor households. The widespread e-banking literacy across different income groups reflects the potential to boost the nobile banking in the country.
According to our survey, only 0.8 percent of the households use their mobile phones for mobile banking as shown in Table 5. The majority Se mobile phones for communication purposes including SMS messaging, which is very popular among the youth. A larger proportion of mobile phone users are familiar with some form of etransactions. For instance, it is reported that US$ 10 million worth of reloading was carried out by small communication shops and boutiques largely located in rural areas for a particular mobile network last year. In this process, the clients hand over the money to such small shopkeepers as a prepayment to increase their balance for mobile phone usage. In most instances, these transactions take place without any documents, and this implies that the mobile phone clients have confidence in such small shopkeepers and mobile phone companies.
As depicted in Table 6, around 85 percent of the households have an account in commercial banks and 43 percent have accounts in credit co-operatives and Micro Finance Institutions (MFIs). A major reason for the high proportion of the
banks in Sri Lal expansion of the In particular, on the government, owned banks - th and the People established a la branches in rural last four decade also have expand through their ex networks. As me the survey reveals of the househol phones. This rat the ratio of house bank account wh percent. This son with the popula proportion of the lower than the pro phone owners countries. Ther relationship betw households wh accounts and the expected, a large non-poor househ accounts. It shou here that the su 1 the amounts of ( poor households a Therefore, the me. bank account doe reflect the savin household.
A larger proport households hav specialised ban. could be expectec banks are sav development ban
Table 4: Awareness and Use of Electronic Banki who are above 16 years of age, n=2,133) Iten Have knowledge
Moderate Non- Poor Ultr poor poo Internet banking 39.81 29.27 33.6 ATM machines 73.90 60.60 47.9 Phone banking 8.84 10.88 15.3 SMS banking 14.45 5.63 4. Cyber banking 453 1.13 e-remittances 20.24 24.77 35. Mobile cash 15.71 9.O. 2.
Source: Household Survey on E-Money conducted by th
10

ka is the rapid anking network. the initiative of the two StateBank of Ceylon Bank - have rge number of areas during the Private banks d their outreach banding branch ntioned earlier, that 71 percent ls have nobile o is lower than olds who have a ch stands at 85 ewhat contrasts belief that the banks is usually portion of mobile in developing is an inverse een the ratio of o have bank income levels. As *r proportion of olds have bank ld also be noted rvey reveals that leposits held by tre extremely low. re ownership of a is not necessarily gs capacity of a
on of ultra-poor : an account in Ks. This finding
as most of these ngs and rural cs which cater to
lower income groups. The semifinancial sector which consists of credit co-operatives and Micro Finance Institutions (MFIs) plays a crucial role in providing deposit facilities, particularly to the poorer segments of the population. Overall, 43 percent of the total number of households has deposits in such institutions. There is a clear positive relationship between proportions of account holdings in the semi-formal sector and income groups. Over 50 percent of poor households have such deposits as against 37 percent of non-poor households.
Our focus group discuss 1 ons indicate that people are increasingly u sing e- cards. However, non - availability of ATM facilities in most villages in the rural sector is pointed out as a major constraint.This is reflected in the lower proportion of ATM card users as against the high proportion of bank account holders, as shown in Table 7
Although the extent of the banked population is satisfactory, our qualitative survey reveals that a greater proportion of them are found to be under-banked for various reasons. A major factor is their low incomes which result in low savings. A large number of households indicated that they do not have sufficient savings in banks, and therefore, they do not require m-banking. We have observed through the focus group
g in Sri Lanka (percentages of household members
Using
Moderate All Non- Poor Ultra All
* poor poor 7 36.90 3.60 2.44 - 3.14 5 69.39 28.23 1.44 7.1423. O7 16.69 1.40 - O.98 8 11.77 O.27 - - O.19 3.47 -Ꭴ.27 - - 0.19
"l 22.08 1.60 - - 1.13 4. 13.41 0.33 − 0.23
author, 2008/2009
Economic Review: April/May 2011

Page 13
discussions a diminishing trend of savings culture among the poor. Inadequacy of household incomes to cope with rising expenses was pointed out as a main reason for such decline by many households. Also, the negative real interest rates emanating from high inflation have inclined the households to purchase property and durable goods rather than to save money. Several households point out that they merely keep a minimum balance in their bank accounts for the purpose of obtaining a loan from the bank at a future date. Hence, motivation to build up savings could not be observed among many households during our discussions with them. Some low-income earners have borrowed from all possible sources, and the bulk of their monthly earnings is used to repay the debts. As shown in Table 8, another major reason for limited accessibility to mobile banking is that they did not have sufficient knowledge about how it works. Some households express their concerns about the security of accessing financial information using a nobile phone.
We have used the collected data to ascertain the relationship between e-banking and determining factors such as age, education, occupation
Table 6:
Sector
Sector
stitutions
Non
Semi-Formal Sector
t
MIFS
Non-poor
and income, as
shown in Table
9. Both the
knowledge about
e-banking and
usage show a
n e g a t i v e
correlation with
age. This finding
is also
supported by
our focus group
d is cus sion
which indicated
that the younger
people are more
banking. Howeve coefficients are except for knowlec banking. E-bank linked to educa coefficients are si level. There does
decisive link bety occupation and 1 with regard to
relation between banking is posit: The coefficients a O. Ol level in 1 reflecting a str mentioned earlier
discussions als profound influen incone on the
facilities.
Percentage of households who have an institution in Sri Lanka (n=834)
Model Poor
17.
4. 1.5
37. .1
Source: Household Survey on E-Money conducted by the
TTable 7: Use of commercial bank facilities (% c
(n=834)
Facility Non-poor Mode
Poor Commercial bank account 89.20 74. ATM card 41.79 22. Credit card 8.80 2. Mobile phone banking 2.88
Source: Household Survey on E-Money conducted by th
- Economic Review: April/May 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Table 5: Purposes of Using Mobile Phones in
Sri Lanka
Purpose ዓ% * Communicate 52.7 Send SMS 32.1 Business 1.5 Obtain information 17.6 Employment 6.1 Banking O.8 Purchase goods 2.3
Source: Household Survey on E-Money conducted by
the author
Percentage of
adult households who use
mobile phones.
accustomed to er, the correlation
not significant lge about internet ing is positively tion, and most gnificant at 0.01 not seem to be a ween the level of knowledge/usage E-banking. The income and eve, as expected. are significant at nost instances ong nexus. As , our focus group O indicated the Ce Of household use of banking
account in a financial
tate
Ultra-poor
: author, 2008/2009
of households) in Sri Lanka
The Potential of Mobile Money Systems
This study has revealed that there are two specific segments which have vast potential to apply ebanking for the benefit of the poor. They are the microfinance industry and the inward remittance market. The country has a widespread network of microfinance institutions, as mentioned earlier. These institutions which are built up on the concept of 'group-lending are much more flexible in providing financial facilities to low-income families. According to our survey, 44 percent of the surveyed households are members of microfinance organisations. This reflects the extensive outreach of microfinance industry in the country. However, we have observed that none of these institutions including the major ones has adopted ebanking facilities. A main reason for this is the nonapplication of ICT in their operations. Taking into account the large amounts of transactions they handle daily, on the one hand, and the
All
42.9
rate Ultra-poor All w i d e s p r e a -d
availability of mobile 90 68.80 84.7O phones in O5 16.67 35.73 households, on the 56 6.83 other, there is O3 n. 2.28 c on side r a b le
e author, 2008/2009
potential to adopt
11

Page 14
mobile banking in the microfinance sector. This will not only help to improve efficiency, but also to reduce transaction costs.
The other area that has potential to apply nobile banking is the inward remittance market. An estimated stock of over 1.6 million Sri Lankan migrant workers, mainly in the Middle East countries, annually remit foreign exchange over US$ 2.5 billion, easing the balance Of payments disequilibrium. They account for about 8 percent of the country's GDP (Gross Domestic Product). Migrant workers send their earnings to their relatives and friends living in Sri Lanka by using different channels, including (a) formal banking channels, (b) by hand through persons travelling to the country, and (c) informal channels. Although the bulk of remittances are channelled though formal means, as much as 45 percent of total remittances are estimated to be remitted trough informal channels. The oligopolistic remittance setting in Sri Lanka as well as in host countries have led to the growth of informal channels. Meanwhile, banks have been increasingly popularising eremittance facilities such as internet banking, e-Cash, X-press Money, Money Gram,
pyramid. Tabl This will
also be facilitated Hig by the | Les recently- Di1 improved No computer Nei literacy as No well as All t h e Sour outstanding * As h i g h ba COO
literacy level. Bank nobile bankin instruments to is urban areas wher. to spend a lot of ti visit a bank branc away place. Thi mobile phones ha such areas as wel have to play an un proactive role in th to the bottom through such dev from our study th and economies ( overriding factors making process of financial instituti reaching out the lo through devices
banking. The hc indicates that th poor, who are usu
Ez-Money and Table 9: Pearson Co Telemoney. Hence, a and some o rapid expansion of e- Variables
remittance could be expected in the near future,
This study shows that currently the use of ebanking facilities is relatively low in Sri Lanka. Nevertheless, the country's widespread banking network and ICT infrastructure provide considerable potential to foster e-banking at a faster pace, benefiting the bottom of the
Know about internet banki
Using internet banking
Know about ATM machines
Using ATM machines
Know about phone banking
Using phone banking
Know about SMS banking
Using SMS banking Know about cyber banking Using cyber banking Know about e-remittances Using e-remittances
Know about mobile cash
Using mobile cash ** indicates Correlation is si * indicates Correlation is sig
Source: Household Survey
12

Major reasons for not using mobile banking
in Sri Lanka
Reason ዓ% * costs 8.0 security 2.3 cult to use 9.4 understanding 39.3 er heard 15.5 neCeSSary 25.6
1 OO.O
e: Household Survey on E-Money conducted by the
author
a percentage of households uho do not use mobile
king
s need to expand and similar plated rural and : customers have ne and money to h located in a far s is feasible as ve penetrated in l. The banks will conventional and is regard to cater of the pyramid ices. It is evident at profit making of scale are the in the decisionbanks and other ons, rather than w-end customers such as mobile usehold survey 2 majority of the ally characterised
by low financial literacy, do not have any understanding about mobile or e-banking facilities. This kind of information asymmetry can be overcome through counselling, advertising and publicity programs. Early action needs to be taken by the stakeholders to harness the potential to adopt m-banking in the microfinance industry and remittance market.
Conclusion
Sri Lanka has experienced a phenomenal growth in ICT in the last two decades. The rapid penetration of mobile phones is particularly significant. These developments reflect the country's strong potential to take advantage of electronic banking and mobile money. These innovative financial
Contd. on page 35
rrelation Coefficients between e-banking Variables f its Determining Factors in Sri Lanka (n=1,672)
Age Education Occupation. Income 2 -O.O50 0196** -O.OO7 0.136** -0.005 O.O36 O.O45 0.109** -0.043 0.256** -O.34O 0.090** -0.047 O.251 ** O.O.04 O.233** -O.040 0.212** -O.O67** O130** -O.O15 0055** O.OO O.O73** -0.039 0.187** -O.O44 0103** -O.O12 O.O27 -O.O14 O.OO9 -0.015 0.127** -0.035 O.O68** -O.OO4 O.O17 -O.O26 O.OO -O.O35 O.O79** -O.O31 0.210 -O.O12 O.O37 -O.OO2 O.O76** -O.O45 O, 197e -0.071** O.O39 -O.O14 0.020 -0.027 0.008
Inificant at the 0.01 level (2-tailed). lificant at the O.05 level (2-tailed).
n E-Money conducted by the author
Economic Review: April/May 2011

Page 15
Financial Crises and
Introduction
inancial crises are not new to the world. According to available literature, financial crises in the world date back to the 1819s when there was a major financial crisis in the United States of America (USA) sWikipedia, 2011).
The causes of the financial crises were different. In the 19th and early 20th centuries, many financial crises were associated with bank runs, systematic banking crises and banking panics while many recessions coincided with these panics (Wikipedia, 2011). Financial crises can be banking crises, international financial crises and wider economic crises (i.e., recessions and depressions). A situation where a commercial bank sudden rush of withdrawals by depositors is called a bank run. In such situations, banks cannot immediately fulfil the entire demand for money by the general public, because the bank may have invested its money in a variety of assets, gains of which may realise during a long period of time. This may lead to a bank panic or banking crisis. Examples of bank runs can be seen in the USA during 1931. An international financial crisis may occur when a country is suddenly forced to devalue its currency because of a speculative attack. This may be referred to as a currency crisis or a balance of payment crisis. Likewise, when a country fails to pay back its sovereign debt, it is referred to as A balance of payment crisis along with a sovereign default can lead to a sudden stop in capital inflows or a sudden increase in capital flight. During 1992-1993, some countries in Europe faced with a similar type of international financial crisis.
suffers , a
a sovereign default.
- Economic Review: April/May 2011
Further, there v financial crise American coun defaulted their 1980s. A wider et con sist of a depression. A slo for a continuous called a recessi recession may b depression. The in the 1930s is for a depressior recent sub-prim and the real experienced ar starting in 2008 in the USA and in
countries.
Causes of Final
The causes offin depending on tl crisis. Sometim only one cause f be difficult, and place as a result These causes :
macroeconomic microeconomic reasons. Most of
macroeconomic c
blamed for finan trigger of financi due to errors in policies adopte authorities. Hig shift of exchange un necessary slov increases in infla the macroeconor trigger a crisis. interest rates In short-term capita difficulties f
institutions and
When countries
maintain excha automatically t different rate regin imbalances in thi
Examples for th

, their Lessons
ere international in many Latin ries, when they
lebt in the early
onomic crisis may recession or a w down in growth period is usually on. A prolonged referred to as a great depression such an example Similarly, the 2 mortgage Crisis estate bubble ound the world led to a recession a number of other
cial Crises
ancial crises vary he nature of the es, recognition of or the crisis may a crisis may take of many causes. may be due to circumstances, policies or other the time, adverse levelopments are scial crises. The ial crisis may be macroeconomic d by relevant h interest rates, rate regimes and v down or sharp tion are some of nic reasons that
Although high ay attract more , they may create or financial | governments. are unable to nge rates, they ry to shift -into nes, thus causing 2 external sector. ese can be seen
Dr. W. M. Hemachandra
Assistant Governor, Central Bank of Sri Lanka.
during the Mexican Crisis from 1995 to 1997 and the South-East Asian Crisis fron 1997 to 1998.
Prolonged deficits in the current account may lead to un stable macroeconomic conditions creating The countries which have deficits will have problems in financing their budgets, mobilising savings and debt management. Likewise, the Mexican Crisis had a route of deficit in the current account, while the South-East Asian Crisis was created due to capital flight. Shifting of exchange rate regimes and high short-term borrowing created instability in these countries and ultimately led to capital flight, causing a financial crisis.
a financial crisis.
microeconomic policies can also cause financial crises. The Ireland's financial crisis occurred due to a property lending boom. Similarly, in most countries, weaknesses in the supervisory role of financial institutions either due to insufficient legal framework or weaknesses in supervision may lead to a failure of financial institutions. Lack of transparency in providing information to supervisory authorities sometimes leads to a collapse of financial institutions. Mismanagement of financial institutions is a common cause for failure of financial institutions in emerging markets. Examples for these types of financial crises can be found in Sri Lanka where several financial companies failed during 1988 - 1989.
Unfavourable
13

Page 16
Mismanagement of credit given to financial institutions may create credit bubbles, and bursting of which, may lead to failure of financial institutions. The credit crunch in the USA during 2007-2009 was one of the reasons for the recent financial crisis where US financial institutions failed as a result of their inability to repay loans. Sudden withdrawals of bank credit develop difficult situations for the borrowers to repay the credit.
Government directions sometimes due to political reasons can pave way for a financial crisis. For instance, sub-prime mortgage crisis in the USA was created partly as a result of over-supply of construction industry which was encouraged by government directions. The assassination of political leaders in Mexico created financial sector chaos and resulted in a withdrawal of short-term foreign finance which led to a financial crisis.
Financial products, if managed properly, would help develop financial markets. However, development of sophisticated financial derivatives beyond the safety levels may lead to a collapse in these financial markets. One good example for this type of crises is the recent US financial crisis which had a link to sophisticated and un manageable derivative products.
Undue, developments in the debt market, particularly in the government debt, are one of the common causes of financial crises which have common examples from most countries. During 2010-2011, failures in Greece, Ireland and in several European countries occurred due to excessive levels of public debt.
The foregoing explanation supports the fact that financial crises may occur due to one or a series of causes. At the initial stage, one of the several causes would adversely affect one sector such as commercial banking, which would
impact other secto situations. Sim occurred in one co in crises in other instance, the So countries' financi started in Thailan other countries
Therefore, a conta a cause of a finar US crisis in 2008
the other countri Therefore, de pe severity of the crisi there would be glo
US Sub-Prime M from 2007
The US sub-prime was one of the wo crises. The crisis bursting of the
housing bubble a rates on “sub-prim. rate mortgages whi began in 2005/( lending is the prae loans to borrowe qualify for marke owing to various r as income level, s payment made, cr employment statu borrowers are r “prime” or as “su prime borrowers h rating based on th while sub-prime
track records in
below par. Loan prime borrowers a sub-prime loans. ' poor and the you. bulk of sub-prime
Roughly, five yea 2007, many banl loans to sub-prime did so, because, t the real estate be people to repay th taking to buy O Government all lenders to lenc borrowers. Wit booming and the with liquidity,
investors saw portfolios as alter
14

s creating worse larly, a crisis intry may result countries. For th-East Asian l crisis initially and spread to subsequently. ion effect is also cial crisis. The affected most of s in the world. nding on the s in one country, bal effects.
ortgage Crisis
mortgage crisis rst-hit financial
began with the United State's nd high default 2" and adjustable ch approximately )6. Sub-prime Lctice of making :rs who do not it interest rates isk factors, such size of the down edit history, and ls. In the USA, ated either as b-prime". The ave a good credit eir track records borrowers have repaying loans s given to subre categorised as Typically, it is the ng who form the
borrowers.
is leading up to is started giving borrowers. They ney believed that om would allow a loans they were r build homes. so encouraged to sub-prime 1 stock market system flushing many big fund ub-prime loan native investment
opportunities. Hence, they bought such portfolios from the original lenders. Thus the sub-prime loan market became attractive.
One major contributory factor for this crisis was the boom in the supply of housing, which resulted in falling prices and an increase in the default rate of sub-prime borrowers, many of whom were no longer able to repay their loans. Another factor was the problems in collateral for buying houses in the USA. This took place with increased supply of houses for sale while there was a low demand which resulted in decline in house prices. This was coincided with the slowdown in the US economy which made natters worse.
Since the risk of default on such loans was higher, the interest rates charged on sub-prime loans were also higher than the interest on prime loans. However, the repayment capacity of sub-prime borrowers was doubtful. Further, lenders devised new sophisticated instruments, such as derivative productš, to reach more sub-prime borrowers. Sometimes, these instruments included payments from the borrowers on different mechanisms, such as the repayment of the principal portion which was to start later. The links of complex derivative products on the loan portfolios were very complicated. Therefore, there were more doubts about the ultimate re
payers.
Not only the reckless lenders, but also big institutions such as, Freddie Mac and Fannie Mae, which owned or guaranteed more than half of the outstanding in home mortgage in the USA were widely thought as being more prudent than many others in their lending practices. Ultimately, they too suffered from billions of losses. Not limiting to the se financial institutions in the USA, the crisis affected institutions such as Citigroup and Merrill Lynch which are global banks and brokerages to write-off billions of sub-prime losses. Furthermore, despite
Economic Review: April/May 2011

Page 17
efforts by the US Federal Reserve to offer some financial assistance, the crisis led to the collapse of Bear Sterns, one of the world's largest investment banks and securitiestrading firms. The crisis also extended to Lehman Brothers and American Insurance Group.
This crisis affected, not only these American institutions, but also many banks in other parts of the world. Since the USA was the biggest borrower in the world, most countries which held their foreign exchange reserves in dollars and invested in the US Securities were badly affected. Countries like Japan, China and India which had invested in the USA had direct adverse impacts from this crisis. Also the global equity markets were badly hit from it. Other than these, countries which had trading links with the USA were affected due to the down-turn in the USA. Therefore, effects of the US crisis were, not only limited the US economy, but also to the global
economy.
Consequences of the US Crisis
As a result of the mortgage crisis, lenders in the USA were unable to recover their credits. A number of financial institutions collapsed, and bu sinesses of many non — financial institutions, such as car producers, garment sellers and food sellers faced difficulties in selling their products. Consumer prices in Advanced Economies as identified by the International Monetary Fund (IMF) grew only by 0.1 per cent in 2009. Mortgage giants such as, Fannie Mea and Freddie Mac were affected extensively. The fourth largest investment bank in the USA, the Lehman Brothers, Wall Street's fifth largest bank Bear Stearns, which was acquired by another organisation, and Merrill Lynch collapsed. A number of financial institutions were declared bankrupt, merged, acquired by other organisations, bailed out by the governments or nationalised. An Insurance major, American Insurance Group, was also under severe pressure and collapsed. Not
only in the USA,
countries of the Sector, a numb institutions as w firms collapsed crisis. For instan and European insurance giant nationalised to
survival. The ( which is a car-pro USA, and Mark 8, with a decline in
Rating Agencies ( investment rating financial Unemployment su of employment be several countries in Advanced classified by IMF) i cent in 2009. Th Officers of Seve Group and Merril down.
The World Ban predicted a slow growth in the ric
the globe. Cu balances in a nur countries bec
Countries suffer demand for their g and fell into rece houses and ot. services fell. The
Suffered with falle US recession was by the National Bu Research; a leadin economists from institutions. The
that more US wi jobs in 2008 tha: the World War II.
Not only the US economies suffere
countries such a
and India faced declines in expli COInnon even to
countries in Asia IMF warned that til growth was to fa cent in 2009. D world output in 20
- Economic Review: April/May 2011

but also in other : Euro Banking ) er of financial ell as producing due to the US xe, Northern Rock banking and Fortis were partly ensure their
eneral Motors, ducing firm in the Spence were faced
their sales.
lowngraded their s of a number of
institutions. urged and growth :came negative in . Unemployment Economies (as increased by 8 per e Chief Executive ral banks (Citi |l Lynch) stepped
k and the IMF rate of economic hest nations and arrent Account nber of advanced ame negative. 'ed with lack of oods and services !ssion. Prices of her goods and e stock markets en markets. The officially declared |reau of Economic g panel including
major academic figures indicated orkers lost their n any year since
and European :d, but also other as China, Japan heir biggest ever orts. This was
other exporting
and Africa. The he world economic ll to just 0.5 per ata showed that 09 dropped by 0.6
per cent. The International Labour Organisation said that as many as fifty one million jobs worldwide could be lost in 2009 because of the global economic crisis.
In order to respond to the crisis, policymakers, including Federal Reserve Bank and the US government, took comprehensive measures to overcome the adverse effect which arose from the financial crisis. Because of the contagion effect of the US financial crisis, many other central banks around the world too took actions to correct the situations in their countries. Among the policy actions, there were monetary policy measures, amendments to legislation, government bail outs and other joint actions implemented. Under the monetary policy measures, reduction of the interestrates and providing liquidity assistance to the affected financial institutions were some of the policy measures implemented by countries. Likewise, new legislations were introduced under regulatory amendments. Legislations relating to lending practices, bankruptcy protection, tax policies, housing, credit counsellors, education and licensing of lenders were drafted or amended by affected countries. Governments came out with financial facilities and proposals for acquisition Of financial institutions. Larger financial institutions such as Freddie Mac and Fannie Mae were taken over by the Federal Reserve Bank and several other financial institutions acquired some of the failed financial institutions. A number of larger financial institutions were acquired or amalgamated by other institutions in the USA, the UK (United Kingdom) and many other European countries. Also the US government started purchasing of large amounts of illiquid mortgagebacked securities form financial institutions. Several governments initiated actions to get the approval from their national legislatives to extend bail out amounting to billions of dollars as a measure to
15

Page 18
the crisis. Banks increased the amount of loans to small- and medium-sized enterprises. A number of regulatory measures for accounting standards were also proposed by many countries. In addition to these governmental efforts, the Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan, the Bank of Canada, the Swiss National Bank and the Swidish Riks Bank announced measures to release liquidity to financial institutions. The IMF provided financial assistance for some countries.
Financial Crises in Sri Lanka
So far, Sri Lanka has not faced a severe crisis. However, the country has faced some difficult economic situations, particularly in the financial sector. A banking crisis occurred in Sri Lanka during the 1880s when the coffee plantations, one of the major sectors that contributed to national economy, were faced with a disease called coffee blight. Several banks which had extended their services to the plantation sector collapsed due to this, and the then government was compelled to intervene and bail out some affected banks during that time (Karunatilake, 1986). Other than this crisis, no noticeable financial crises have taken place in the history of Sri Lanka.
In the recent past, after the political independence in 1948, several financial companies in the country collapsed during 1988 and 1989. The Central bank of Sri Lanka responded to this crisis by extending financial support for distressed financial companies (Central Bank of Sri Lanka, 1988 and 1989). Some of the collapsed financial companies were closed and some were rehabilitated, however, this crisis was not wide spread.
During 1993-1996 government recapitalised State banks, i.e., the Bank of Ceylon, the People's Bank and the National Savings Bank to strengthen the capital base of
these institution cannot be consi situation, but as the governmen government bank
In addition to th several occasio faced with someh to country's bala and fiscal manag economy on the government and of Sri Lanka ob assistance severa standby arrangen IMF. Since 1965, the country rec under this arrang seven other insta that the governn financial assistar to overcome diffi Sri Lanka.
Sri Lanka’s fil1 stability was not a US financial cris. country require reserve situati affected due developments. In 2009 and 2010, th to recover fro: situation which during the latter the beginning of , experience facec world due to the was not experien The robust le available in Sri external capit corrective measl in regard to fina particularly i: supervision institutions, w reasons that hel impacts from crisis. How intensification was spilled into the economy, th crisis was felt external sector
economy.
As a result of t many investors in short-ter
16

However, this :red as a crisis step taken by to strengthen
se situations, in s, the country rdships in regard ce of payments ment. To set the right path, the he Central Bank ained financial times under the ent facility of the the first year that ived IMF funds ment, there were nces up to date lent has sought ce fron the IMF ult situations in
ancial system ffected due to the s. However, the d to correct its on which was
tO external the latter part of e country was able m the adverse was experienced part of 2008 and O09. The terrible by the western JS financial crisis ced by Sri Lanka. al background Lanka, closure of Ll account and res implemented incial institutions,
the area of of financial are some of the bed evade adverse he US financial ver, with the f the crisis that the real sector of effect of the US strongly by the if the Sri Lankan
e financial crisis, ho had intervened investments
repatriated their investments back to their home countries to meet rising liquidity requirements. The foreign funds which were invested in debt instruments such as Treasury Bills and Long-Term Bonds in Sri Lanka were withdrawn from the country as a result of the global financial crisis.
Due to the slowdown in crisisdriven countries, the demand for Sri Lanka's exports, particularly apparel products, declined substantially. This was a combined effect of reduction in global demand for textile exports and high competitive nature of the export market. Similarly, there was a decline in Sri Lanka's export products such as tea and rubber. Also the growth of the industrial sector decelerated in 2008 compared to 2007. Meanwhile, some local industries resorted to short-term layoff of workers as a result of decline in demand for their export products. The growth of services sector also declined and adversely affected the tourism sector in which tourist arrivals dropped due to the global crisis.
The decline in export earnings and withdrawal of short-term investment by the foreigners, resulted in the balance of payment problems in Sri Lanka. The high growth of imports and lower growth of exports too contributed to a substantial expansion in the trade deficit in 2008 and built up pressure on the exchange rates. The Central Bank of Sri Lanka responded by selling its foreign reserves to prevent exchange rate from devaluation.
The impact of the global crisis through the channels as explained above ultimately resulted in a slow rate of econonic growth in Sri Lanka. The impact of the crisis on the economic growth was severely felt during the last quarter of 2008 and the first half of 2009. The lowest economic growth in the first quarter in 2009 which was 1.6% indicated the adverse effects of global crisis on the Sri Lankan economy.
Economic Review: April/May 2011

Page 19
The financial system of the country was robust and was not directly affected by the crisis. No banks collapsed in Sri Lanka. Although some financial companies faced some difficulties during 2008, there was no threat to financial stability in the country. The country was able to maintain price stability too. The inflation declined to sharply to 4.8 per cent by the end of 2009 (Central Bank of Sri Lanka, 2009).
Les sons from the Financial Crises
As described above, financial crises are not new to the world, but they have occurred throughout history. These financial crises have taught many les sons to regulators, governments, financial institutions and to the general public at large. In spite of many lessons learnt from the historical financial crises, financial crises have occurred repeatedly. The lessons learnt may be of macro or micro importance. Some argue that to avoid financial crises, solutions should be tried. Conversely, Alan Greenspan, the US Federal Reserve’s previous chairman, suggests that no one should try any action and says that things went well over the long period of deregulation and lighttouched oversight, while arguing that the global financial system is now "unredeemably opaque” that policymakers and legislators cannot hope to address its complexity. However, some argue that Greenspan is wrong and crisis that threatened the foundation of the American economy, led to soaring un employment, a continuing foreclosure crisis and weakened economies in the USA and Europe. It would have been a grave mistake not to address problems of inadequate regulation and lax oversight (Barney Frank, 2003). Hence, the arguments for and against the actions to be taken to prevent financial crises are different.
Based on these crises, the following lessons can be highlighted for regulators and financial institutions to overcome or at least
- Economic Review: April/May 2011
to reduce adve: possible crises:
(i) Many financial the necessity regulations to ta of financial insti US crisis, it was regulations are institutions that
From the recent
appears that th regulatory mec failed financial ir to a financial crisi repercussions. T required, not c financial institut regulate new p) derivatives, to
Further, these transparency thro services that wi. regulators to ac about the entire
The mechanisms Basel III, etc. al some capital req will ensure th institutions. Th are ex-ante prev anticipating poss in advance. How argue that these impose controls liberalisation phi
(ii) The Asian fin erupted due to “fundamentals” exposed themselv speculative move and short-term c no regulations
mechanisms aff This was purely prevailing philosť to all kinds of
Therefore, regul careful. The fa became very dep investors whose
whether a co fundamentals in other speculator This created structure and u.

se impacts from
crises have taught
f strengthening kle the behaviour utions. From the emphasised that equired to tackle are too big to fail. financial crisis, it e weaknesses in hanisms fuelled stitutions and led s which had wider he regulations are nly to regulate ions, but also to 'oducts such as evade troubles. laws increase ugh new financial Il give powers to cess information financial system. such as Basel II, so have imposed uirements which he stability of ese mechanisms entive measures sible weaknesses
wever, some may regulations may preventing the losophy.
ancial crisis was poor economic The nations 'es excessively to ments of capital apital flows, with and controlled ected the most. because of the phy of openness financial flows. tors have to be ct is that Asia indent on foreign concern was not untry had its order, but what s were thinking. very volatile timately a chain
Short-term borrowing increases vulnerability to shocks. The shortterm flows coming in can quickly flow out. Thailand was an example for this where withdrawals of shortterm finances created the financial crisis in South-East Asia. At present, the IMF supports imposition of controls on shortterm finances.
reaction of crises. foreign
(iii) The crises have taught us the necessity of proper macroeconomic management. In that, controlling inflation, prudent exchange rate management, deficit financing management have shown great importance. Some small economies such as Singapore and New Zealand have both liberalised capital accounts and floating exchange rates under their macroeconomic framework. In these countries, institutional arrangements exist, to limit the in centives for excessive risks taking. In Singapore, this is done through supervision and regulation. In New Zealand, there is an emphasis on transparency and managerial accountability to stock holders and public at large. Accordingly, under macro-economic management, proper external and internal economic management has to be in place to avoid crises and the necessity for carefully designed monetary policies which manage inflation and liquidity has been emphasised. In a number of financial crises, the regime shift of exchange rate has led to financial crises. To prevent this type of crises, proper management of external accounts including exchange rates and the external reserves is required.
(iv) The crises which led to reduce expenditure of households ended up with recessions. When there is in the monetary side and credit will take
a crisis, restrictions
place, resulting in a decline in
17

Page 20
demand for goods and services. These measures may impose restrictions on small- and mediumsized enterprises. The US crisis, which provides an example, led to reduce consumption of the households and resulted in a drop of demand for goods and services produced by firms. This ultimately led to a world-wide crisis, adversely affecting exports of emerging economies while it created a recession in many countries including the USA and the UK.
(v) Another lesson that can be learnt is the avoidance of over reaction ίΟ short-term developments. This may be relevant to domestic sector or to external sector activities. Korea, at end of 1997, experienced a sharp exchange rate devaluation which was largely unanticipated. This triggered an unprecedented banking crisis. Therefore, countries should consider long-term perspectives rather than short-term goals when they consider monetary and fiscal management.
(vi) The effects of the crisis are long term and costly. Many countries happen to spend a lot of taxpayers' money to rescue failed financial institutions. This was clear from the US crisis that billions of dollars were pumped from the government to bail out failed institutions. This was not limited to the USA, but also to many countries in the world that came up with financial assistance from the governments to rescue financial institutions both in the government and the private sectors. Even in Sri Lanka, during the period where there was a distress in the companies, the government (Central Bank) extended financial assistance to rescue finance companies from collapsing.
financial
(vii) It is required to have sufficient supervision and adequate public disclosures to prevent the failure of financial institutions. Strong measures have
been implemen countries to streng activities, while c( the USA and those with strong strengthen the Financial instit respond to th: favourably to p1 collapses. Ever prudential superv action on financ protected the co adverse effects of that occurred art Because of the st and timely measu in Sri Lanka, the to protect itsell effects of the So crisis and the measures implen issuing guideline directions on ca) ratios, corporate g performing loa continuity plans imports, and limits for bankers, col risk-based implementation Customer (KYC) pc limits on comr borrowings, a management c financial instituti financial crisis in lax of provisionin of concentration exposures, lack liquidity managen weaknesses in s regulatory Therefore, finan should respect to regulatory arran future crises.
(viii) To protect mechanisms su Insurance Scl favourable grounc effects of the c Japan came ou insurance schen too, provisions w to establish a d scheme. This mo a part of risk man authorities with i
18

ed by many hen supervisory antries such as in G20 came up 2gislation to supervision. tions should supervision event possible in Sri Lanka, sion and timely al institutions untry from the ne several crises und the world. ong supervision es implemented ountry was able from adverse uth-East Asian JS crisis. The Lented included s/instructions/ pital and credit
overnance, nonn s, bu sines s , payments to of remuneration nmencement of supervision, of Know Your blicy, introducing nercial banks' nd appointing ommittees for ons. The Korean 1997 was due to g, poor standard of risk and large of good internal ent controls, and upervision and arrangements. cial institutions supervision and ements to avoid
the depositors, ch as Deposit emes provide s to avoid adverse ises. In 1996,
with a deposit e. In Sri Lanka re made recently posit insurance ve, which may be gement, provided nproved flexibility
to deal with failed financial institutions. The IMF has stated that world's largest and most important banks should pay additional fees to address the risk of liquidity shortfall in their institutions that may cause wider damage to the financial system.
(ix) Private financial institutions also should act proactively to regulators' actions. The perception that official resources can be used to bail out creditors generates moral hazards. It could lead to excessive risk taking by lenders and funding of less economically defensible projects and may aggravate the possibilities of crises. After the adverse experiences of the recent crisis in the USA, regulators are considering imposition of regulations to limit gearing capacity, enhance capital adequacy, and to conduct stronger stress tests on financial institutions. The private sector responses to governments' or the regulators' actions are required to prevent crises.
(x) Financial Institutions, especially banks, should carefully arrange investment portfolios drawing attention to both liquidity assets and profit-generating assets to maintain public confidence which is very important for their functions. Liquid assets and profitgenerating assets have two ends, and their proper maintenance may ensure confidence of the public as well as profits of the financial institutions. The global financial crises have taught lessons emphasising the importance of maintaining a healthy financial system based on public confidence and generating profits.
(xi) Today, the handling of risk exposures of financial institutions plays a very critical role for their survival. In the current world, types of risks are different. Financial institutions have to tackle many types of risks to maintain their credibility, and hence, risk management has become very essential. Adverse risk management is partly responsible
Economic Review: April/May 2011

Page 21
for the US financial crisis in which a number of financial institutions failed due to poor risk management. Maintenance of transparency is also a part of the risk management. The dealing with sophisticated derivative products which was the main cause behind the US crisis carried enormous risks to financial institutions. Therefore, financial institutions should pay attention, not only to current risks, but also to future risks.
(xii) One of the prominent characteristics behind financial crises has been the insufficient awareness of the financial products and activities of financial institutions. During the crises, it was evident that the staff of the financial institutions as well as the general public did not have proper knowledge of the financial products. The general public usually goes for high returns without considering much the security of the assets. This can create substantial losses to the depositors. The awareness of the staff members of the financial institutions O various developments is also essential when the functions of financial institutions are carried out. A team of well-qualified and experienced staff is required for financial institutions for which training and capacity building are essential.
(xiii) Some crises have erupted due to political reasons. The crises occurred with this background have created unemployment and problems in income distribution resulting in changes in political environment. For instance, in Thailand, the Prime Minister was forced to resign and President Suharto in Indonesia stepped down after 32 years of autocratic rule. South Korea also had political changes. In South Korea the autocratic government of Kim Young Sam was replaced by relatively untainted regime of Kim Dae Jung. So, the lesson learnt from this is that financial crisis may lead to a political crisis as well.
- Economic Review: April/May 2011
(xiv) Crises h importance of relations. A cour
tackle a crisis. T
in South-East A: have proved th international acti
effect: requested co-c Europe to tack crisis which repercussions. countries in Eurc this by adopting and fiscal polic number of cou :
financial assista
financial insti
reduction in the i
one of the combine measures adop countries which h adverse repercus crisis. Therefore, international c required. casualties of fina
come due to lack dialogue. It is sa North-South dialo whole burden of e
crises on the deve
adverse
Sor
The above-mentic be treated as glo we have learnt
situations. Sri
adversely affected crisis in the U available improve situation, favou: background, pru and the timely relevant authoriti
of the Central Ba highlighted ten le the financial crisi
(i) Be prepared is having to wear the storm is conil is on the deck. Th introduce one provision to all b the measures til Bank took in adv,
crisis.

ave shown the
international ntry alone cannot he crises such as
sia and the USA le ne cessity of on to avoid their
S. The USA peration from le the financial
had global
A number of ope responded to parallel monetary y measures. A intries provided ance to affected
tutions. The
Interest rateS WaS 'd monetary policy oted by many elped in resolving ssions of the US to tackle a crisis, :o-operation is ne argue that ncial crises have
k of North-South
aid that a lack of
ogue has put the ffects of financial loping countries.
oned lessons can
obal lessons that from the crisis
Lanka was not
due to the recent SA because of
d macroeconomic rable regulatory dent supervision action taken by Eés. The Governor
ank of Sri Lanka
ssons learnt from s, as given below:
in advance: This
a life vest when ng when someone he action taken to percent general lanks was one of hat the Central ance, prior to the
(ii) Develop the ability to move quickly and decisively: The central bank gave clear signals on what exactly it was going to do. This prevented the impact crisis.
(iii) Read and realise the global developments quickly: For this, proper information was required and the Central Bank watched global developments such as crashing of big financial institutions and economies in the world.
(iv) Take a long-term view of the factors and take accordingly.
CaSU Te S
(v) Deal clearly and decisively: In this, it is required to tell clearly what is to be done by the stakeholders.
(vi) Implement package of policies without relying on one. Central Bank had multiple plans to deal with the problems that it faced with regard to international reserves.
(vii) Work closely with the government, the political authorities: This is required to achieve a common goal and to implement strategies accordingly.
(viii) Take advantages of opportunities in the market: The Central Bank built up not only the domestic currency market, but also the capacity of foreign currency market in Sri Lanka.
(ix) Think rationally of the law of unintended consequences: For instance, imposing a tax on gold reduced gold imports substantially in Sri Lanka.
(x) Address global problems in a globalised manner: The Central Bank took action to take up the issues as and when required with the IMF. So, granting of additional SDR (Special Drawing Rights) allocations to countries was one of the outcomes of this.
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Although the above text indicated ten lessons from the financial crises, it is necessarily not needed to limit it to ten.
Conclusion
This paper attempted to classify financial crises in some order, find out causes of financial crises, while explaining the USA sub-prime mortgage crisis in 2007 with consequences of this crisis, and explaining the history of financial crisis in Sri Lanka. Finally, it highlighted lessons which were learnt from the crises. Examples were provided from many financial crises, such as Mexican crisis, South-East Asian crisis, Ireland financial crisis and the latest from the sub-prime mortgage crisis in the USA to identify the causes of financial The paper identified the failures of financial institutions and the actions taken by authorities to resolve the adverse effects of the crises.
crises.
The paper highlighted many lessons that could be learnt from the crises. The need for and/or importance of regulatory requirements, macroand micro-economic frameworks, supervision, mechanisms such as deposit insurance to mitigate risks, a proactive role of the financial institutions, managing portfolios and risks and a team of skilled staff for financial institutions to avert/ manage financial were highlighted. It also showed that there were political reasons for some financial crises, and international relations to avoid adverse impacts of the crises were important. The paper finally indicated some actions that helped Sri Lanka to avoid repercussions of financial crises.
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Montes F Manu Lessons of the E Asia Pacific”.
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Page 23
The Role of Informat in Combating Globa and Terrorism Final
Introduction
oney laundering and
terrorism financing are
financial crimes that are becoming an increasing global problem since the 1980s. As a result, the Financial Action Task Force (FATF), a 33-member organisation whose main responsibility is to develop an international standard for antimoney laundering and combating of terrorism financing, WaS established, and the first internationally-recognised AntiMoney Laundering (AML) and Counter Terrorism Financing (CTF) programme was established.
Today, anti-money laundering and counter terrorism financing compliance is a regulatory requirement promoted by several conventions and international treaties. Compliance is required to:
i. Meet international obligations and needs to combat money laundering and financing of terrorism,
ii. Maintain good relations with foreign and international organisations,
iii. Avoid financial penalties, and
iv. Maintain reputation.
In its simplest form, an anti-money laundering and counter terrorism financing compliance requires an entity to:
i. Implement an organisational anti-money laundering and counter terrorism financing program,
ii. Verify the identity of customers before providing them with designated services, and
iii. Report suspicious as well as certain specifically defined transactions.
- Economic Review: April/May 2011
Anti-money launc terrorism financi an information The accuracy, c timeliness of the in the program the success o Information risks of confidentiality of availability, authenticity an repudiate info activity can affect program. Th management of related technol essential part of laundering a1 terrorism financi
What is Money Terrorist Finan
Money launderin hiding the orig obtained money.
Nations Convent Traffic in Narc Psychotropic Subs United Nations C Transnational C (2001), this inclu
i. Knowingly converting proper of crime,
ii. Concealling th movement, and rights of prope proceeds of crime iii. Acquiring, ( property, know property is the p.
Terrorist fina solicitation, provision of fu terrorist acts
financing of terrc by both legally

on Risk Management 1 Money Laundering
cing
ering and counter ng compliance is ntensive activity. ompleteness and information used are essential for the program. , such as, breach and integrity, lack un certainty of d the ability to rnation-related the success of the erefore, risk information and ogy becomes an the anti-money nd countering
ng programs.
Laundering and cing?
g is the process of gin of illegallyAs per the United ion against Illicit otic Drugs and stances (1988) and onvention against )rganised Crime des:
transferring or ty that is proceeds
source, location, ownership and rty that is the , and
wning or using ring that such "oceeds of crime.
ncing is the ollection and nds to support or groups. The rism can be done - and illegally
Wipul Jayawickrama
Infoshield Consulting
obtained funds. The International Convention for the Suppression of the Financing of Terrorism (1999) states that a person commits the crime of financing terrorism "if that person by any means, directly or indirectly unlawfully and wilfully, provides or collects funds with the intention that they are to be used, in full or in part, in order to carry out" acts of terrorism.
While similar methods are used for both money laura dering and terrorist financing, and proceeds of money laundering may be used in the terrorist financing, the two processes do not share the same goal. The goal of money laundering is to conceal the source of illegallyobtained funds. The goal of terrorist financing is to collect and provide funds for terrorist activities.
How Big is the Problem?
Money laundering and terrorism financing are crimes that have far reaching negative economic and social impacts on the society, resulting in destabilised economies and wide-spread social impacts such as crime, substance misuse and loss of life. Unfortunately, both money laundering and terrorist financing are pervasive.
It is difficult to measure the actual amounts of money laundered or used to fund acts of terrorism. FATF has admitted that it is 'absolutely impossible to produce a reliable estimate of the amount of money laundered'. There is very little published statistics, but it is
21

Page 24
common agreement that billions of dollars of illegally obtained money is laundered each year.
The available statistics are staggering. In a recent report released by the Colombian Ministry of Finance, the estimated amount of money laundered internally was 8.667 Billion Dollars. This is 3 per cent of the Gross National Product (GNP) of Columbia. The report also states that there were 42,950 suspicious transactions reported over the past 5 years. It is surmised that a major proportion of this money comprises of cash smuggled out of US and Canada, and that it is used to finance the Columbian narcotics industry.
A report by the Australian Institute of Criminology in 2007, estimated that AUD 2.8 to 6.3 billion was laundered "in and through Australia.
Regardless of the actual figures, money laundering and terrorist financing pose a significant problem to governments and society as a whole.
Combating Money Laundering and Terrorist Financing
Due to the transnational nature of both money laundering and terrorist financing, international cooperation is required to combat these global threats. It also requires internationally-accepted policy and standards to ensure a unified and coordinated approach. Since 1989, FATF has been the body that develops and promotes international policy. FATF has published 40 recommendations and 9 special recommendations, commonly known as the 40+9
recommendations and al 'Methodology for Assessing Compliance with the FATF 40+9 Recommendations'.
Other influential internationallyaccepted conventions and directives include:
i. United Nations Convention against Corruption,
ii. Council of Eu on Laundering, Se Confiscation of th Crime and on th Terrorism,
iii. European Parli on the prevention financial system f money launderin financing,
iv. United Natio1 against Terrorism
Many govern implemented legisl to combat money terrorist financing compliant with mentioned con directives. Legisl deterrent to money terrorist financing provides a frame action agains perpetrators of th
Impact on Finan
Financial institutic systems consti proportion of the used to convert an funds. Instrument credits, travellers cheques, money securities, bonds, of credit, are uses laundering and te activities. Ther concern about th institutions an system in these As a result, comp money launderi terrorism financi mandatory institutions.
The penalties for can vary in diffel Non-compliance ( and financial depending on the law can also hold an organisation For example, in A of anti-mont legislation can r criminal penaltie leadership.
22

ope Convention 'ch, Seizure and
Proceeds from ; Financing of
ment Directives f the use of the the purpose of and terrorist
s Conventions
nents have tive frameworks laundering and activity that are the aboveventions and ation acts as a laundering and activities, and work for taking t identified ese activities.
cial Institutes
bns and banking tute a large platform that is ld transfer ilegal is such as, bank cheques, bank orders, shares, drafts and letters l in both money rrorist financing e is a serious use of financial il the banking illegal activities. liance with anting and counter ng regulation is Ο financial
non-compliance ent jurisdictions. an result in legal penalties, and Iurisdiction, local ndividuals within iable to penalty. ustralia, a breach W laundering sult in civil and to organisational
Financial penalties can be heavy. There are several instances where financial organisations that are in breach of compliance requirements have been heavily fined. Some examples of fines imposed on financial institutes in the past few years include:
(i) Bank of Ireland - £375,000 in 2004 for issuing 40 unidentifiable bank drafts,
(ii) Royal Bank of Scotland - £ 750,000 in 2002 for not having adequate controls to verify the identity of their clients £5.6 million in 2010 for lending to people on government ban lists, (iii) Abbey National Banking Group - £2.3 million in 2003 for breaches of the anti-money laundering regulations and breakdowns in systems and control procedures, (iv) Riggs Bank - US$25 million in 2004 for failing to design and implement a suitable anti-money laundering program. A further USS 16 million criminal fine,
(v) ANZ Banking Corporation USS5.75 million in 2009 for violations of US sanctions against Sudan and Cuba,
(vi) Pacific National - US$ 7 million in 2011 violation to the Bank Secrecy and US Patriot acts.
The impact on financial institutes is not limited to financial loss. Reputational damage can be significant, and may result in restrictions and sanctions imposed on the institution depending on the extent of the breach, both resulting in loss of revenue and their competitive edge.
Therefore, the establishment of anti-money laundering and counter terrorism financing programs is a non-negotiable requirement for the financial industry.
The Organisational Anti-Money Laundering and Counter Terrorism. Financing Program
Many countries have imposed mandatory reporting requirements for large transactions to respective reporting authorities. For example, in the United States of America,
Economic Review: April/May 2011

Page 25
there is a requirement to report all transactions over USD 10,000 to the Internal Revenue Service. Similarly, in Sri Lanka transactions over LKR 1,000,000 have to be reported to the Central Bank's Financial Intelligence Unit (FIU). Most banking and financial systems possess the capability to identify and generate automated reports of these transaction.
However, experienced money launderers do not conduct large transactions that result in drawing attention to them. It is the responsibility of the financial institution to implement suitable procedures and systems to:
(i) identify sanctioned and suspicious customers and transactions, and
(ii) Report sanctioned and suspicious transactions ίΟ appropriate authorities.
To be able to identify and report sanction ed and su spicious transactions, the organisation needs to have a robust anti-money laundering and counter terrorism financing program. Aspects of this programme include:
i. Maintaining an anti-money laundering and countering terrorist financing policy, ii. Maintaining organisational awareness of the policy and its implications,
iii. Maintaining a list of global sanctions obligations,
iv. Providing training to relevant staff
on identifying and reporting sanctioned and suspicious transactions,
v. Designing business rules to ensure that no individual transaction can knowingly breach anti-money laundering and countering terrorist financing,
vi. Defining clear processes to enable
identification and reporting sanctioned and suspicious transactions,
vii. Implementing controls to prevent deliberate subversion of the compliance requirement,
viii. Ensuring that business partners do not engage in business activities that can lead the organisation breaching applicable compliance requirements, and
ix. Screening new and existing customers and staff to ensure that they are not on a sanctioned list.
- Economic Review: April/May 2011
The Rolle o Technology in Process
There is an onsubvert the antiand countering programs. The becoming
sophisticated. Th timely, accura information is successful anti-1 and countering program. This rec of information-re to filter customer this data for anc
Typically, technic anti-money la countering terrori rule-based anal name analysis transactions. F frequency and si and flags to indic person is on a wa to identify tra potentially cou. money launderil financing acti detection based C analytics can be smaller and transactions and to conduct transa that such subve detected, intellig such as link ana analysis and
matching should good anti-money countering terr technology imple
The Role of In Management
Anti-money la countering ter) programmes a intensive. The u information, for e. as simple as a mi name with alter result in a sev breach. A prem information me inability to prev transaction. information risk integrity of an oth anti-money laund Therefore, is it im that information throughout til laundering and financing prograr

f Information the Compliance
going attempt to money laundering errorist financing se attempts are increasingly erefore, access to e and relevant critical to a noney laundering errorist financing uires efficient use lated technologies data and inspect malies
logy used in the undering and sm financing uses ytics capable of and profiling of or example, the ze of transactions tate that a certain toh list were used insactions that ld be related to ng and terrorism vity. However, on such rules and subverted using distributed using associates ictions. To ensure ersive activity is ence capabilities lysis, peer group time sequence be integral to a laundering and orism financing mentation.
formation Risk
, undering and 'orist financing re information se of inaccurate cample something s-spelt name or a hate spelling can ere compliance ature release of y result in the ent a suspicious Many other s can affect the erwise successful ering programme. portant to ensure risk is managed le anti-money counter terrorist
l.
Information risk management is the application of the generic process of risk management to information assets and the information environment. All aspects of information risk, i.e., the risk of breaches of confidentiality; integrity and availability on information as well as nonrepudiation of information-related activity are applicable in the antimoney laundering and countering terrorist financing information management environment. Other information-related risks can include breach of privacy and data protection legislation.
Due to the sensitive nature of the anti-money laundering and countering terrorist financing information environment, an active approach to information risk management should be adopted. Information is subject to various vulnerabilities and threats. These could be inherent to the information systems as well as deliberate attempts of subversion.
Internal risk management frameworks, information governance frameworks and
information security management programmes should be used to create a secure environment for storing, processing transmitting and archieving of information used in the anti-money laundering program.
In Summary
There are global obligations and compliance requirements imposed on governments and various commercial and non-commercial entities to identify and report suspicious transactions that may support money laundering and terrorism financing activities. Antimoney laundering and counter terrorism financing reporting programs are highly information intensive. Breach of information attributes, such as, confidentiality, integrity, availability authenticity and non-repudiation can impact the outcomes of the se programs resulting in penalties, reputational loss and negative impacts on international relationships. Therefore, it is important to ensure that an effective information risk management program is in place to support the objectives and integrity of these programs.
23

Page 26
Development of Bank A Critical Assessmen
Banks and Development
Banking
espite the establishment of the Ceylon Savings Bank, the State Mortgage Bank and the Bank of Ceylon, nothing meaningful happened in the area of banks and banking law in the country until independence and the establishment of the Central Bank of Ceylon. Also, banking in pre-independence Ceylon was dominated by foreign banks (mainly British) and some Indian Banks.
The South Indian Natukottai Chettiar "merchant bankers” and the native “shroffs" of the foreign banks, acted as the middlemen between the Ceylonese borrowers and the lender banks. For an excellent discussion of banking and finance of that period, any researcher or student should look at the Pockhanawala Commission of 1934 as the country's first Banking Commission that was named after its Indian Chairman, Sir Sorabji Pockkanawala.
The Finance Minister of the first post-independence government of Ceylon (J. R. Jayawardena) deliberately looked not to England, our colonial master - but to the United States for assistance to setup our banking system. The Americans gave as Mr. John Exter who had just completed an overhaul of banking for the Philippines. John Exter transplanted his legislation for Philippines on Ceylon. His report (now a Sessional Paper) is an excellent one. By the Monetary Law Act of 1948, he set up a Monetary Board (the legal entity) and a Central Bank (popularly called
Reserve Bank in Western
Countries and eve Jayawardena was s very pleased with invited him to be th of the Central Bank post he accepted.
As a relevant ane« "Central Bank” po in the English la Sinhale se and T “ Madyama Banj translation of *Ce
The well-known
Malalasekera is saj this dilemma. He
the term “Maha B one will contest it entity is the Mone not the Central words, any lega act the Central Bank
name of the “ʻMone
Another postmilestone was the by statute of the 1961 to take over the Co-operative which had been se'
which had not b Thereafter, (in my the mid 1977, government espou: liberalised econo1 nothing significan manner we have inc
what banks can do economy. Until Jul the few developm above, as a whole, a highly-regulate financial systel Central Bank con
Development ( Banking Law aft
After the elect government in Ju
24

ing Law in Sri Lanka:
t
1 in India). J.R. Dr. Wickrema Weerasooria
aid to have been
John Exter and
e first Governor of Ceylon which
dote, the name sed no problem nguage, but in amil, it meant cuuva” like a
ntral Province”.
Professor G.P.
d to have solved
had said to use
ankulua and no ... Also, the legal tary Board and Bank. In other .ion by or against has to be in the :tary Board"
-independence e establishment people's Bank in and improve on Federal Bank tup in 1949, but
ee a SlcCeSS. view) until about when a new sing an open and ny was elected, occurred in the
w come to accept to galvanise the y 1977, except for ents mentioned the country had ld banking and n with strong rol.
of Baalks and er July 1977
ion of a new y 1977, with the
Economic Review: April/May 2011
Insurance Ombudsman and Senior Consultant to Postgraduate Institute of Management.
advice and assistance of the International Monetary Fund (IMF) and the World Bank (WB), significant developments took place in banking and the law associated with it. The most important was the enactment of the Banking Act. The Banking Act No 3 of 1988 (amended since then) supplemented the postindependence statute (Monetary Law Act No 58 of 1949) which established the Central Bank of Ceylon. It is these two statutes plus their amendments that banks should bind together and always have with them along with the several Gazette Notifications and Circulars issued by the Central Bank of Sri Lanka. The Banking Act defines "banking business” for Sri Lanka and provides the procedures for licensing of banks and their regulation and control by the Central Bank of Sri Lanka. Only incorporated bodies approved (licensed) by the Central Bank of Sri Lanka can engage in banking business.
Special Debt Recovery Laws for Banks
I now turn to what is considered as an extraordinary and special privilege that bankers in Sri Lanka enjoy. This type of privilege enjoyed by our banks is not found even in developed countries. We are here referring to the (legislation) entitled:
Statute. S
(i) Recovery of Loans by Banks (Special Provisions) Act No 4 of 1990 as amended.

Page 27
(ii) Debt Recovery (Special Provisions) Act No 2 of 1990 as amended by Debt Recovery (Special Provisions) Amendment Act No 9 of 1994,
These two statutes which are categorised as special debt recovery legislation were the product of a report issued in 1983 by a Debt Recovery Committee, chaired by Mr. D Wimalaratne, a retired Supreme Court Judge. The legislation was not enacted until 1990, because of very strong opposition from the Sri Lankan Bar Association which argued that the proposed legislation was "discriminatory, draconian in their nature and harsh and superfluous”. Yet despite all opposition, both statutes became law from 1990.
Recovery of Loans by Banks (Special Provisions) Act No 4 of
1990
Currently, this Act provides one of
the most important statutory
remedies (popularly called “Parate Execution”) available to banks against defaulting borrowers. Whenever default is made in the payment of any sum due on a loan, the Board of Directors of any commercial or other specified bank may by resolution in writing authorise any person to sell by auction any property mortgaged to the said bank or may authorise any person to enter upon any immovable property mortgaged to the bank and to take possession of such property and thereafter, to manage and maintain such property until all monies due to the bank have been fully paid.
The majority of the reported case law on banks and banking since 1990 up to date is on "Parate Execution" cases. The country's newspapers have also benefited because, everyday, Parate Resolutions of Banks are advertised (as required) in the media.
- Economic Review: April/May 2011
Debt Recov Provisions) Act Amended by (Special (Amendiment) A
This is the seco gives extraordinal This statute app institutions' as c 30 of the Act. The
licensed comme finance companie financial institut provides a very procedure for
overdue debts. T also given a wi Section 21 of the
while under Sect
no money specifie default or delay
debt can be recov institution und procedures, the R rule prohibiting interest in excess
sun lent has be this legislation. E Ordinance of 185 recovery of interes principal sum len of the Amended permits the recov excess of the prin
Issuing Cheques to Honour them
Although titled th (Special Provisio 1990, the above-r (quite strangely)
IIĩattCTS IìOt. COIì1 recovery. For inst of the Act makes
person:
(i) To draw that there are no
in his bank accou cheques;
(ii) To draw ( countermand thei the cheques will

ery (Special No 2 of 1990 as Debt Recovery Provisions) it No. 9 of 1994
ld statute which y power to banks. ies to all “lending efined in Section
term includes all rcial banks and s and specialised Lons. The statute
easy summary the recovery of he term 'debt is
de definition in Act (as amended).
ion 22 of the Act d as a penalty for in payment of a ered by a lending 2r these special onnan-Dutch Law the recovery of s of the principal ten abolished by ven the Civil Law 52 prohibited the st in excess of the ut, but section 18 Act No. 2 of 1990 ery of interest in ncipal sum lent.
without Funds
he Debt Recovery ns) Act No 2 of nentioned statute also legislates on hected with debt ance, Section 25 it an offence for a
:heques knowing : sufficient funds
nt to honour such
heques and then r payment so that not be honoured.
Many law enforcement officers and even some lawyers are not aware of the above new provisions (may be because it is found in this statute) and still proceed to prosecute such offenders under the "cheating" provisions of our Penal Code.
Supreme Court Narrows Down “Parate Execution” by Banks
In 2005, in a Five-Judge Supreme Court decision headed by the then Chief Justice Sarath Silva (with one dissent of Justice Shirani Bandaranayake) the Court refused to recognise that any property mortgaged other than by the borrower will be subject to parate execution. In other words, third party nortgages would be excluded from the right to parate execution. This judgment was delivered in the case of Cheliah Ranachandran u Hatton National Bank, Supreme Court Appeal Nos 5 and 9/2004 — S.C. Spl. Leave No. 328i, 33, decided on 1 April 2005). Accordingly, the signal sent by the Supreme Court is very clear. The judiciary will not extend parate execution. Rather, the judicial trend will be to narrow its operation. More recently, in 2011, Parliament passed amending legislation under which "Parate Execution” will not be permitted in the case of loans under Rs 5 million.
Nominations in Bank Accounts
Another little known development in banking law is the provisions enabling "Nominations” to any bank account other than current accounts. This was done by an amendment in 1993 to Section 544 of our Civil Procedure Code. Now, any customer can nominate any person of his choice to be the beneficiary of the assets of that account (e.g. Savings account or fixed deposit) and such nomination takes precedence even over a Last Will of that customer. Public awareness must be created about this "nomination” because banks as a matter of routine get sign such
25
CustOnerS to

Page 28
nominations without advising them of their effect. A customer may nominate a person known to him for convenience, but never intending that the nominee should benefit over his natural heirs.
Confidentiality of Bank
Accounts
In England and many other countries, bankers' confidentiality and secrecy about bank accounts is an established principle of English common law. However, in Sri Lanka, these secrecy provisions have been embodied in section 77 of our Banking Act of 1988. My view is that we should have let the common law handle this topic because when you legislate lawyers often want to interpret the legislation to suit the case in hand
Bank's on Dormant
Accounts
Duty
On the other hand, a good legislative provision is the provision in the Banking Act of 1988 relating to Dormant Accounts and abandoned property of customers. These are accounts not operated for over ten years. From 2008, the Central Bank of Sri Lanka has, for the first time, activated these statutory requirements, and now, all banks must report to the Central Bank of Sri Lanka any such assets (balances). The public would have seen newspaper advertisements of banks on this topic. In other countries, this is done every year, because, the statute applies to accounts that are not operated for ten years; so every year, the tenyear rule will apply to a few accounts. Up to 2008, one wonders what happened to monies in such dormant accounts.
No Significant Litigation and Judicial Decisions on Banking
A book published by the author, Casebook on the Lau of Banking and Cheques in Sri Lanka, clearly shows that we do not have any major issues in this area. From the time of the Civil Law Ordinance of 1852,
it was the English applies to bank issues in the Islal about the applic Dutch Law to ban by a Bench of Fi Supreme Court in of De Costav Bank in 1969. In that c Ceylon was succe liability for co negotiable inst Collecting Bank. T of our Supreme C interesting judgm English Law of Ba. applied in Sri judgments run int seventy pages. In 1 judgment in that c. Christie Weeramar become a globallyof great eminence. understanding delivered in that c a good idea of bar application in Sri
Roman-Dutch Law Common Law. A applies only in two countries in the wo and Sri Lanka), an the "business o example, guara custody) will be gov Dutch Law. How after the decision i. of Ceylon, there ha for bankers betw Roman-Dutch Lav existed "in har diversity of our system has not c. bankers.
“Customary Ban
As stated earli. applies to "bank business”. Sec Banking Act of “banking busir customary banki June 2008, as judiciary, the Professional Ban (APB) published i four areas of acti banks which a "customary bank
26

law that clearly and banking d. Some doubts tion of Romaning was cleared e Judges of our the famous case of Ceylon decided se, the Bank of ssfully sued for nuersion of a
(ru In ent aS a here, five Judges urt gave several ints on how the king came to be anka. All the a total of about ny view, the best ase was by Judge try who has now recognised jurist By reading and the judgments ase, one will get king law and its Lanka.
t is, however, our lthough it now ) out of over 190 prld (South Africa y activity outside f banking" (for ntees and safe 'erned by Romanever, in practice n De Costav Bank s been no conflict een English and 7. Both laws have nony” and the country's legal used concern to
king Practices”
:r, English law s” and “banking ion 86 of our 988 in defining ess” speaks of ng practices. In a guide to our Association of ers of Sri Lanka a booklet thirty ity engaged in by re regarded as ng practices” and
which should, therefore, be governed by English Law. At the APB's request, this writer compiled this publication which was launched by Senior Supreme Court Judge Mr. Justice Saleem Marsoof at a public event in Colombo. This compilation of "customary banking practices” in 2008 was a landmark event because no other country has done so.
Salgado Presidential Commission on Finance and Banking (1991)
It is appropriate to mention the work done by the Salgado Commission (named after its Chairman Dr. M. R. P. Salgado) appointed by the then President in 1991. It issued nine reports on many important areas of banking and all the se reports were published as Sessional Papers and contain invaluable information and data on the subject.
Whom does Banking Law Favour, Bankers or their Customerso
The answer to this question is not easy. Many bankers and average customers will say that banking law favours banks and that the scale is always tilted in favour of banks. However, if one does a careful evaluation of banking law and read through an established English text on banking law (such as Paget or Chorley), one will come to the conclusion that banking law favours customers rather than their banks. The following reasons are highlighted for the above view:
Firstly, banks have to comply with several statutory provisions in legislation such as the Banking Act, the Monetary Law Act, and other more recent legislation. The customers need not worry, because it is the obligation of banks to ensure that the legislative requirements are observed. As a famous English judge said, “The business of banking is not the business of the customer but that of the bank”.
Economic Review: April/May 2011

Page 29
Second, banks act at their peril and take obvious risks in undertaking the payment and collection of cheques for their customers. No doubt, they make a profit by dealing in cheques, but when one closely examines the judicial decisions relating to payment and Collection of cheques, it is clearly evident that banks responsibility compared to their
have al O 6Ol S
customers. A collecting bank's only protection from liability to an action for conversion is to prove that it acted in good faith and without negligence. Owing to the number of cheques that go through the banking system everyday, and because of the elaborate frauds practised by persons who steal other people's cheques, sometimes banks fail to prove that they were not negligent. Similarly, a paying banker's obligation is also onerous though he is not exposed to as many risk as a collecting bank. Forgery of signatures of cheques is also common risk. A bank that pays a forged cheque is liable to its customer. A forged mandate is no mandate.
On the other hand, compared to the onerous, day-to-day responsibility of banks, customers of banks, owe only tuo duties to their banks. First, to draw cheques carefully so as not to facilitate forgery. This is called the Macmillan duty after the English case that established it: see London
Joint Stock Bank Ltd v Macmillan (1918) AC 777. The second duty is to inform the bank inmediately of any forgery of his or her cheques, if such forgery has occurred. This is called the Greenuood duty based on the English decision in the case of Greenuwood v Martins Bank (1933) AC
51.
Thus, it is evident that the law has placed a higher legal burden and
responsibility o. their customers
customers borr
from banks th
reversed. The cu the depositor becomes the bori in lending tran favours the bank them special p
powers.
What I have sai
not mean that it
against a bank. M
it. The costs and
will exhaust ar.
individual custo
Recent Le 1 Importance to 1 Financial Insti
Today in 2011,
vibrant Banking
banks and branc.
foreign banks ope. However, still the
Bank of Ceylon,
and the Nationa
dominate the ba
nearly 70% of t. regards Banking place today al.
statute law. I ref
the following pie which every ba
conversant with:
i. The Monetary
Act No. 32 of
ii. Information ar Technologv A
iii. The Banking
No. 2 of 2005
iv. Financial Tran
Act No. 6 of 2
v. Prevention of
Act No. 5 of 2
Economic Review: April/May 2011

banks than on . It is only when ow or take loans
at the roles are stomer- originally - creditor, now ower — debtor and sactions the law s such as by giving parate execution
d the above does
is easy to litigate y advice is against delays in litigation ld frustrate any
ne.
gislation of Banks and other
tutions
Sri Lanka has a
sector with local
hes of well-known
rating side by side. : State banks (the the People's Bank al Savings Bank) nking sector with
AS
Law, we have in
he business.
the necessary er in particular to ces of legislation
nker should be
Law (Amendment) 2002,
d Communication ct No. 27 of 2003,
Amendment) Act
sactions Reporting 006,
Money Laundering 006,
vi. Convention on the Suppression of Terrorist Financing Act No. 25 of 2005,
vii. Payment and Settlement
Systems Act No. 28 of 2005,
viii. Electronic Transactions Act No.
19 of 2006,
ix. Computer Crimes Act No. 24 of
2OO7.
x. Companies Act No. 7 of 2007,
xi. Intellectual Property Act No.
36 of 2003,
xii. Consumer Affairs Authority Act
No. 9 of 2003,
xiii. Payment Devices Frauds Act
No. 3O of 2006,
Of the above legislations, the Financial Transactions Reporting Act of 2006 is of great day-to-day. importance to banks. It laid down verification requirements for identification of customers, and under it, cash deposits of over Rs one million have to be notified to
the Financial Intelligence Unit (FIU) now set-up in the Central Bank Sri Lanka. Under the Payment and Settlement Systems Act of 2005, cheque clearance is fully automated and now handled by Lanka Clear Ltd. and what we now get is a computer-generated facsimile of the
The Electronic
Transactions Act of 2006 and the
Computer Crimes Act of 2007 takes
cheque.
care of the developments of E
Commerce.
I conclude this brief synopsis of the major banking lau developments since independence in 1948 with comments about our Banking
the
established Financial Ombudsman
Regulator and newly
Scheme.
27

Page 30
The Central Bank’s Rolle as the
'Regulator”.
As a Regulator the Central Bank of Sri Lanka has been "Pro-Active” when required to be so and acted as a Supervisor - which, in my view, should be its normal role.
in 20 1 1,
"Regulators".
Today
we do not want
What we want are
"Facilitators". The Central Bank's duty is to safeguard the monetary system and the payment system.
In the open economy which we now
have in Sri Lanka too much
regulation will impede development.
As a Regulator, Central Bank of Sri Lanka has done well. We have not had any major banking collapses. The Pramuka Bank collapse in 2002 was the last of recent origin. Despite, the "Golden Key" fiasco, the Central Bank of Sri Lanka stepped in and prevented any run on Seylan Bank. This Bank is now once again on a sound footing and doing well. True, a number of non - supervised financial enterprises failed - Sakuthi, Danduan and then Golden Key - but to lay the blame for all these failures on the Central
Bank of Sri Lanka is not fair. These were risky financial enterprises paying interest far above the normal possible rates. Also, Golden Key was not an institution supervised by the Central Bank of Sri Lanka which periodically by public notices informs the general public of Institutions supervised by them. When the Central Bank of Sri Lanka publishes notices naming the financial institutions supervised by them, they are indirectly saying all other financial institutions in question are not supervised and hence may be risky. This is the
clear message.
Also one cannot against the Cen Lanka for loss un supervised i England also, t rejected legal cla Bank of Englar Regulator in Similarly, our Su held that Our Ce: Lanka (Monetary sued for loss of C
un supervised
institutions.
Financial Ombu
My last comme:
Financial Ombu
which was comr
which, in my vi
tremendous suc
appreciate that it to customers, the meaningful. I am proud to reco responsible (tog Gaston Gunawa
Secretary Genera
Association of Sri
up the scheme.
to the Central Bai
2002 when I wa
Consultant the
hesitation, the b agreed. It was the “Banking Ombud other supervi institutions
Companies, leasir primary dealers a
it was ultimat
Financial Ombud
Every year, abo hundred custom
the Financial Oml
relief. It is a vel
run at No. 143.
28

take legal action
:Irail Bank of Sri
of deposits in
nstitutions. In
he Courts have
ims against the
d which is the
that
preme Court has
Intral Bank of Sri
Board) cannot be
country.
eposits in failed,
financial
sman Scheme
nt is about the
disman Schene
nenced in 2003
ew, has been a
cess. When you
is a free service
success is more
also happy and
rd that I was
gether with Mr.
rdene, the then
of thc Eckers
Lanka) for setting
recommended it
nk of Sri Lanka in
as working as a
re. After some
anking industry
in to be called the
sman", but since
ised financial
like
ng companies and
finance
lso wanted to join, tely called the
isman’s Scheme.
ut three to four
ers come before
budsman for some y friendly service A, Vajira Road,
Colombo 5. The procedure is not complex and inquiries are held without lawyers, and equitable decisions are given. The banks and other financial institutions who have joined the scheme support it
and are anxious to ensure that it
continues as a success.
It is from the success of the Financial Ombudsman Schene that the Insurance Ombudsman Scheme, was also commenced in February
2ᎤᎤ5 , Insurance Ombudsman from that
and I have been the
date up to now. We both operate from the same building at 143A, Vajira Road, Colombo 5.
Now, we also have a Tax Ombudsman established by the Ministry of Finance. I am advocating that the government should encourage the setting up of more
Ombudsman Schemes such as for
private hospitals (now there are nearly 200 of them in the Island) for Electricity and Water services, etc. Even the Press Complaint Commission set up by the Editors Guild is a type of Ombudsman
Scheme. We must encourage any system of dispute settlement which are alternatives to litigation which is both expensive and has long
delays.
Footnote:
LLB (Hons.), Ph.D (London)
Attorney-At-law, Supreme Court of Sri Lanka; Barrister and Solicitor, Supreme Court of Victoria,
Former Associate
of
University, Australia; insurance
Australia;
Professor Law, Monash
Ombudsman Sri Lanka; Senior
Consultant, Post Graduate
Institute of Management.
Economic Review: April/May 2011

Page 31
Banking Service Development of th
Sri Lanka
Introduction
in effectively functioning
banking sector is essential
for a rapid economic growth of a country. Although in the past, banks have been shown on the supply side of economic models, today, they have changed their position from credit-creating institutions to multi-tasking institutions. Banks, not only grant long-term and medium-term loans and promote saving habits among their customers, but also serve in various dimensions, such as, finance service, insurance, housing subsidies, scholarships, foreign travel, etc. The banking and financial services sector is contributing 7.5% to the Gross Domestic Product of Sri Lanka in 2010 (Central Bank of Sri Lanka, 2010). Moreover, for the livelihood recovery of the war-affected regions, the role of the banking sector is crucial.
The crisis that prevailed in the Northern and Eastern provinces in the past three decades restricted not only the services of the banking sector, but also the customers' investments from various angles. Since the return of normalcy, the government has been focusing its attention on promoting regional equality. International financial institutions, such as, the World Bank and the Asia Development Bank, have been strengthening their network to develop short-term and long-term investments through concessional soft loans, deviating from the policy of providing development grants.
- Economic Review: April/May 2011
Banking servic commenced with
Cooperative Rura Subsequently, t was established in
Central Bank of Si
as a co-coordinat
activities of the
private banks. T habits and r
situations, a sa established unde Savings Bank in this, the Bank o People's Bank we 1948 and 1961 r
the category of banks. Subseque: have been estab
names of : Savini and Investment v
of social and econ of the country.
The Economy o East
The North and comprise of 29 pe land area and 1 population of S available land an
and the skilled of the two provin role in contributi
Output. made disasters, t) the Eastern prov: only as little as the contribution product by the N was limited to a only (Central Ba 2010). The ille by the rebel production an
Due to I

s in Post-conflict Le North and East of
e in Sri Lanka the launching of Banks in 1906.
he Central Bank
1950. Today, the ri Lanka functions ing centre for the State as well as 'o initiate saving actify inflation vings bank was the name Ceylon
1946. Following f Ceylon and the :re established in espectively under State commercial ntly, many banks lished under the gs, Development with the objective omic development
f the North and
East Provinces 2rcent of the total 3 percent of the Sri Lanka. The
d water resources
la TeSOTC6S ces play a major ng to the national natural and manhe contribution of
ince in 2008 was 5.5 percent while to the national
Northern Province mere 2.9 percent nk of Sri Lanka, gal taxes imposed In OVenents On d trading and
Kamesh Suresh 8, Jeyapraba Suresh
Lecturers Department of Economics Eastern University of Sri Lanka
obstacles to inputs due to security reasons were the main reasons for the low output (Sarvananthan, 2008).
levels
The frequent large-scale displacements in the North and East, heavy damages to social infrastructure, destructions to the. production sectors, restrictions on service sectors, such as, education, health and banking, in addition to the restrictions imposed on inputs for reasons of security by both the warring parties resulted in the narrowing of the volume of development-related activities in these provinces. The agricultural activities of the Eastern Province which contributed 39 percent to the agriculture sector of the country had to be abandoned for many decades. In the 1980’s, the contribution of North and East provinces to the total paddy cultivation was 27.8 percent, and this reduced to 24.9 percent in the year 2007 (Amarathunge, 2010).
Further, the taxes in posed on outputs, the barriers imposed on transport, marketing, etc. and other restrictions reduced the output levels of the fisheries sector manifold (Sarvananthan, 2007). These two provinces which contributed 52 percent to the
29

Page 32
fishing industry were able to contribute only 19 percent to the output in the year 2007, especially during the period of war (Amarathunge, 2010). As the A9 highway was closed, the sea food production was marketed through the Palaly airbase. The heavy taxes imposed on these products and the increasing cost of transportation to market, caused severe hardships to both manufactures as well as
COISUJECTS.
With regard to the industrial sector, Kankesanthurai cement factory and the Paranthan chemical factory in the Northern Province and the Pulmoodai ilmanite factory in the East were closed down due to prolonged conflict. This caused unemployment problems to thousands of skilled employees. In addition the resources which were available were, abandoned without utilising them. In 2004, 72 percent of the Northern economy was contributed by service sector (Sarvananthan, 2008). The high level of education made a significant contribution to this. The displacement due to security
reasons was the main reason for
the domestic human resource migration. These caused an impact not only on the employment-related matters, but also on education.
Following the end of the war, State organisations as well as nongovernmental organisations have been focusing their attention on public infrastructure development. Large-scale basic infrastructure is being developed, connecting Arugambay, Trincomalee, Muthur and Jaffna through transport networks. Government and NonGovernmental Organisations are making a significant contribution to the recovery of the livelihood of those living below the poverty line.
The "Marshall Plan" authored by the former U.S. Secretary of State George Marshall played a significant role in the
reconstruction of affected by World was implemented economy of the Eu devastated by w Marshall Plan I, U was invested duri period between (Kelegama, 2010). the social development, all ( the destructed live through banks. functioned as medium-term particularly easy lo formed the basi rehabilitation.
Organisations, su of Bangladesh, I Association (IFLA) in uplifting the live However, formatio. centered organisations with seems to be impo the attention of Nc Organisations on medium and larg who lost their in to be not satisfact the above fact, it possible to re. reconstruct the e opportunities in t with the support
Sector.
S OC
The Banking S Development of
East
It can be said that of the war, banks liquid assets wi regional developm special obligation banks could not the situation o harassment and did not have ad Banks were rob incidents in the where bank iron from the police st were kept for s uncertainty were
30

he regions worst War II. This plan ) reconstruct the opean countries ar. Under the S $ 1,200 crores ng the four-year 948 and 1951 Here, except for infrastructure ther recovery of ihood was made Further, banks ong-term and investors, ans for recovery, s of short-term
ch as, Grameen srael Free Loan play a vital role lihood of people. in of these peopleial network in a short period ssible. Moreover, on-Governmental rehabilitating the e-scale investors
vestinent sees
ory. Considering appears that it is habilitate and intrepreneurship he affected areas
of the banking
ector and the the North and
during the period
safeguarded the sely. Although ent is one of the s, the activities of be carried out in f war. Due to terrorism, banks equate security. ed. There were North and East safes were looted ations where they afety. Fear and the main reasons
for banks not engaging in largescale investments through publicprivate partnerships, The environment of the period was not conducive for major investments or creating fixed assets and their sustainability. Therefore, banks offered only limited primary services such as accepting savings, granting small loans and engaging in pawning services. As the rebel movement groups received information on savings, customers limited the saving activities. The people of the North and East were able neither to invest nor save with interest due to harassments.
Since the liberation of the East in 2007 and the North in 2009, the Government diverted its attention from the success at war to economic development. The Government and other international funding agencies are now implementing projects through the banking Sector for the rehabilitation of the affected communities. Thus, under the program of Mahinda Chinthanaya, several development projects are being implemented in the North and East through “ Uthuru Vasanthaya' (Northern Spring) and “ Nagenahira Nauodaya” (Eastern Reawakening) respectively. This aimed at increasing investment. On the other hand, assistance is offered in various ways to develop State bank networks to enhance the contribution of the banking service in the recovery of the waraffected regions,
Revival of the Banking Sector
The continuous crisis of the war in the past three decades limited the financial service outcomes at various levels in the North and East. Considering the security of the banks, the Ministry of Finance through the Central Bank of Sri Lanka has granted approval to extend limited services in the North and East provinces. People from the backward villages of Kokkadicholai, Vaharai, Karadiyanaru and Mandoor who had to travel over 40 km for their transactions are now able to receive the services at their doorstep. In
Economic Review: April/May 2011

Page 33
Table 1:
Expansion of Licensed and Specialis
Banks from 2006 to 2009 in t
Eastern Provinces
District Total Branch as Banking
2005 2007 2O
1 Ampara 21 72 184 2 || Batticaloa 58 61 72
3 | Jaffna 123 63 176
4 || Kilinochchi 5 12 13
5 | Mannar 14 19 22
6 | Mulaitivu 4. O 11
7 || Trincomalee 63 76 8C 8 || Vavuniya 22 31 33
Total 4O 544 59
Note: * Includes extension offices, pawning centres,
units and pay offices.
Source: Central Bank Statistics
(http://www.cbs1.gov.lk/htm/english/O8 stat
the year 2006, there were 450 bank branches including extension offices in the North and East. This number increased to 640 in the third quarter of 2009, showing a 56 percent growth. Further, in the first half of the year 2010, twenty new banking outlets in the North and 40 new banking outlets in the East were established. Table 1 shows the district-wise expansion of banking network.
The Bank of Ceylon increased its branches from 55 in the year 2008 to 77 in 2009. The People's Bank increased its branches from 72 to 85 and Sampath Bank from 06 to 20, during the same period. In addition, the DFCC Vardhana, National Development Bank, Pan Asia Bank, Union Bank and Lanka Puthra Bank opened two, four, two, one, two and one bran.ch/es respectively in the year 2009. Expansion of bank branches in North and East provinces during the period 2008-2009, is shown in Table 2.
It is significant that, no overseas banks opened their branches in the North and East until 2009. However in 2010, HSBC opened its branch in Jaffna while HABIB Bank expanded its activities to the East. Further, the Central Bank of Sri Lanka opened its fourth and fifth provincial offices in the North and East respectively for better collaboration with its financial
- Economic Review: April/May 2011
institutions, im development work financial insti available resourc regional develo considered as anc extension of bank North and East ri
Although the Mit has intensified thi
and Private Banks East regions, wh other districts,
branches in pri population seems Colombo District,
functioning on th people per branc
Table 2:
fro
Name C
Bank of Ceylon Commercial Ban Hatton National
People's Bank Sanpath Bank L Seylan Bank PLC Housing Develop Corporation Ban National Savings Sanasa Develop All Regional Dev
Total
Source: Central
(http:/,

Sed Commercial he Northern and
Outlets
8
2009
192
82
190
13
25
1
85
42
54O
students' savings
t/s_6.html)
plementation of is and to promote tutions utilise es effectively for pment. This is ther phase in the ing service in the egions.
nistry of Finance e opening of State s in the North and len compared to
the number of oportion to the s limited. In the
658 branches are he basis of 3,831 ch and the Bank
pansion of Bank In 2008 to 2009
Den sity Index remains at 26 percent. In the backward districts of Polonnaruwa and Hambantota, the Bank Den sity Index is 13 percent and 14 percent respectively. Table 3 also shows that banking services have not been adequately expanded in the North and East provinces in line with the population density.
Lendling Programmes for Regional Development Activities
Currently, the government is providing huge amounts of funds to the people of North and East at low interest rates, through expanded bank networks. As a part of this, the Department of Regional Development was established in the East in the early part of 2008, and its service was extended to the North in mid 2 OO9.
Under the co-ordination of this Department, investments and loans are granted for development in various sectors such as agriculture, livestock and micro, small and medium sector enterprises. Long-term loans are also provided for activities such as reconstruction of houses damaged by war and for the purchase of vehicles. Investments shown in Table 4 confirm the huge investment by this Department for
Branches in the North and East
pf the Bank 2008 2009
55 77
k of Ceylon PLC O9 9
Bank PLC 16 19
72 85
td. 6 2O
7 7
onent Finance 2 2
k of Sri Lanka
Bank 24 26
ment Bank 6 7
relopment Banks 11
2O3 263
Bank Statistics
/www.cbsl.gov.lk/htm/english/08 stat/s_6.html)
31

Page 34
the development of North and the East regions in the year 2009.
The improved security situation since the liberation of the Eastern Province in 2008 has enhanced the finance flow in this Province. As a part of agriculture and livestock development, as announced in the budget 2008, loans amounting to Rs. 52.1 million have been provided as poverty alleviation revolving fund for the benefit of 4,732 small entrepreneurs in the year 2008. Apart from this, loans amounting to Rs.432.7 million under rural micro-credit scheme, poverty alleviation micro-credit projects, revolving trust, Susahana -II and Krushi Navodaya scheme, were provided for highland crop cultivation, animal husbandry, fishery, business, tourism and longterm self-employment projects. Under the revolving scheme, these investments are used as continuous investments. In addition to this, an affected individual is offered with Rs 250,000
with a six-month grace period at .
the interest rate of six percent. A total of Rs.423.7 million has been granted. Apart from this, 2,262 loans worth
Rs... 250,000 each
Table 4:
from
2009, for the bel small entreprene the Eastern Prov
Since the libera the Northern Prov May 2009, indu sector developme been rapidly imp due to the activi the banking development und "Awakening North of Rs. 3 billion ha for providing em war-affected pe districts of the N for the recovery cattle raring, fishi minor employr Under this sche amount of Rs.20 granted with a period, at the interest rate of ni scheme is expecte investment, partic class. The loans g sectors and the a implementation North” program Table 5.
Under this schen half of 2010, 4,928 to Rs. 676 million to middle-level i loans were reli objective of short
Payable Loan Scheme Provinces in 2009
Revolving
Lendling Programme
Trust in the year 2008 and
Awakening North special re-finance Revolving Fund for Development of Agro-Livestock Development Project
128 loans Krushi Navodaya scheme worth Rs. 147 Poverty Alleviation Microfinance Pro million in
Poverty Alleviation Microfinance Prc
D e c e rm b e r
2009 obtained for livelihood
Source:
Were
development (Central Bank of Sri Lanka, 2009).
Table 5:
Central Bank of Sri Lanka,
Funds Prov July 2009 t
Sector
Under the Poverty Alleviation Microfinance Project (PAMP), loans amounting to Rs 175 million were granted to 27,086 small ventures through the banks up to
32
Trade and other self-en Agriculture and related
Livestock development Micro and small enterpr. Fisheries and related ac
Total
Source: Central Bank of

efit of Table 3: Density as per Population urs in District Population Bank Density r:1CC. per Branch Index
Batticaloa 10,327 1 O ion of Trinconnalee 11, 152 O9 nce in | Mullaitivu 35,800 O3 strial Kilinochchi 35,800 O3 &## Source:Central Bank Statistics ties of (http://www.cbsl.gov.lk/htm/english/08 stat/ Se C tOr s_6.html) er the
"program. A sum is been allocated ployment for the pple in the five orthern Province
in agriculture, ng, business and lent Venture S. ne, loans to the 0,000 have been six-month grace
concessionary ne percent. This d to enhance the :ularly the middle ranted to various mounts since the
of "Awakening 2009 is given in
he, up to the first 3 loans amounting have been granted nvestors; these eased with the -term recovery.
Development of the Agriculture Sector
A total of 323,000 hectares of agriculture land was abandoned due to security reasons. Now, the Department of Agriculture is engaged in recovering the land that remained abandoned since the liberation of the North and East Provinces. According to the Department of Census and Statistics (2010), national paddy production increased by 17.5 percent and livestock production increased by 2.6 percent in 2010 due to the commencement of recultivation in the liberated areas of the North and East and also due to the currently prevailing situation in these districts.
Under the New Comprehensive Rural Credit Schene, Rs. 1,943 million was released for crop cultivation in 2008/2009. Out of
for the Development of Northern and Eastern
Fund Allocation loan scheme Rs. 3 Billion Eastern Province "Rising East" Rs. 1 Billion
Rs. 5 Billion
Rs. 3 Billion ect (Revolving Fund) 2009-2013 Rs. 3 Billion ject II JPY 2.1 Billion 2009.
ided under "Awakening North” Program from
December 2009
Fund Allocation Number of
( Rs. million) loans granted ployment activities 215 1285 ctivities 141 l,081 136 1,126 SCS 56 496 Civities 36 365 584 4,353
Sri Lanka, 2009.
Economic Review: April/May 2011

Page 35
this, 60 percent was granted for paddy cultivation. Further, under this system, loans were granted for the cultivation of paddy and cash crops such as potatoes, onions and chilies. Facilities and opportunities were also provided to farmers to obtain loans at a low interest rate of eight percent under the Krushi Navodaya scheme. Furthermore, the Bank of Ceylon has been promoting huge investments for the purchase of machinery for the adoption of technology in the agriculture sector with the aim of agriculture development in the East. Loans amounting to Rs. 4.7 million have been granted for the purchase of 85 paddy harvesters.
Agriculture and Livestock Development Loan scheme (ALDL) was introduced in the Budget 2008 to increase milik production. An allocation of Rs. 10 billion was made for the purchase of equipment for milk producers and farmers, and for the establishment of milik processing industries. Up to now, out of this only Rs. 70 million has been obtained as loan for a single milk production factory in the East and the balance has not been utilized yet. Managers of banks point out that the main reason for this situation is the drawback on the part of the people in preparing business plans.
The fisheries sector is the second important sector in the North East. Although, currently, there are several loan schemes for the development of the fisheries sector, medium-scale investors have
obtained more benefits under these schemes. These schemes grant Rs. 250,000 for the purchase of fishing gear, out-motors, etc., at a very low interest rate of four percent, to be
settled in ten instalments. Out of
the recovery loans granted by banks, this is the only loan granted at the lowest interest rate. Further, the granting of loans up to Rs. 60 million to an individual for small and medium industrial development at 8.5 percent interest rate will lead to high investment. Since the end of the war, the contribution of the
regions such a Vavuniya which a fresh water fish
raised the nationa by 12.2 perc (Department o Statistics, 2010).
Short-term as w loans are being gr. affected tourism s
and East. The grants loans for of hotels with 650 purchase of vehic tourists in Pasiku
in the East. In ac also granted for th eggs, vegetables, development of such as yoga and banks are assist
Province in touris: various aspects, t extended to the
once landmines a
coastal areas.
Special Pover Scheme
With the objecti income level of th implemented not and East provin certain selected a single family is production and C A group of 5-10 p. obtain a loan up eight percent inte surety. This contributes con improvement of through pover Further, it forms wis e coordina More over, acc Manager, Bank O. Region, this loan alnost 100 perc the North and Eas to other loan sys un educated ordir numerous proble bank loans as the conditions of obt such a situation, of the co-ordinati
- Economic Review: April/May 2011

S Mannar and re favourable for production has ul fish production ent in 2 0 1 0 f Census and
ell as long-term anted to the worst ector in the North
Bank of Ceylon the development
beds and for the les for the use of dha and Nilaveli ldition, loans are le supply of meat, etc. and for the support services
Ayurveda. While ing the Eastern in development in he scheme will be Northern region Lre cleared in the
ty Alleviation
ve of improving he poor, PAMP is only in the North ces, but also in districts. In this,
considered as a onsumption unit. poor families can to Rs. 50,000 at rest without any
loan facility siderably to the living standards ty alleviation. a basis for groupited outcome. ording to the f Ceylon, Eastern system has been 2nt successful in st when compared tems. Generally, nary people face 2ns in obtaining y cannot fulfil the aining loans. In the responsibility on group forms a
basis for granting this loan under reduced conditions.
Other Social Welfare Activities
Banks, along with other types of loans for employment initiatives in the North and East, also offer numerous loan-related support services. The Bank of Ceylon is engaged in reconstruction of houses for the people affected by tsunami. Banks have been offering loans up to Rs. 1 million at a very low interest rate of 4 percent to compensate for the loss of basic infrastructure of the middle-income group. They also provide credit on leasing of vehicles, materials, land, equipment, etc. at the interest rate of 8-12 percent, for entrepreneurship development. In addition, banks also release professional loans educationalists at the rate of 8 -13 percent interest. It is a remarkable fact that the loan released by banks increased by 39.6 percent in 2010. It was for hou sing, bu siness centres, buildings, asset development, etc. that a large amount of loan has been released.
for
Another contemporary evolution in the services of the banking sector is the pawning service. service which was carried out on a limited scale has now been simplified and an amount very close to the price of a gold sovereign (Rs. 40,000) is offered as a loan on a competitive basis. Apart from these, banks offer free employment and life insurance to trusted customers and security and surety bonds to Con tractOS- In addition, multifaceted welfare subsidies, such as, scholarships to the children of customers, free scholarships for overseas studies, donation for public events, etc. are also offered by banks.
Pawning
Challenges and Opportunities
A healthy environment has now been created for the people and the banks to function without pressure.
33

Page 36
At the same time, livelihood and basic infrastructure Te - construction in the North East region has been commenced as an essential service and intensified and expedited to contribute to national development. It is not an easy task within a short period of time to rebuild the severelydevastated and ruined networks that had suffered disasters simultaneously by man as well as nature continuously over the past 30 years. In this context, it is inevitable that the banking sector resort to strategies to face the following challenges to achieve the contemporary objectives which is regional development:
The customers who do not settle the loans which they obtained over the past 30 years due to destructions of war, are included in the defaulters' list and they are not eligible to obtain loans again and this has created gaps between the banks and customers. A new strategy with conditions needs to be developed to re-connect these customers. The "Highway theory” introduced by people like Mohamed Yunus offers solutions in this
COIntext.
Some of the entrepreneurs who obtained loans through banks under the war recovery scheme to engage in enterprise development were subjected to continuous natural disasters such as heavy floods in 2010/2011. They were unable to settle their loans as the appropriate insurance policy was not in force. Due to this, the liquid assets of the banks were blocked, and this caused a negative impact in the finance cycle. For disasterprone investments, compulsory insurance plans such as those implemented by Grameen, Virac and Asha in Bangladesh need to be implemented to safeguard customers and Banks, in Sri Lanka.
Although, several new banks have opened to extend the banking activities in the North and East, there are still some challenges for short-term rehabilitation such as
finding new c assessing the Divisional secreta the certifying aut significant role il personal details Therefore, the int custoners on the of Divisional Sec acceptance of the lead to create customers easily period.
Customers, whi destitute havin livelihood asset problems in subm documents of
expected for the g As a result, custo of receiving bank such a situation, for the banks to guarantor system
Though the ban expanded its ser areas, few village a access to these f people spend se obtain banking expansion of banl been proposed by the banking sect services are av doorstep of the pe doubt that bank strengthen. Ther Bank of Sri Lanka the banks shou the establishmer and the expal branches already
With the objective production an opportunities
investment prob are granted to inve employment to under the out-of promotion schel East provinces levelled on the in district investors negative impac exploitation of lot denial of employm to local resident could be solved b
34

ustomers and r credibility. ries function as ority and play a confirming the of custoners. oduction of new recommendation etaries and the group surety will credibility of within a short
have become g lost all their s, face various itting the original fixed property ranting of loans. mers are deprived ing services. In it is appropriate accept personal
S.
king sector has vices to several areas do not have acilities and the veral hours to services. The king services has people as well as Cor. When such tailable at the 2ople, there is no ing services will efore, the Central and the heads of ld take steps for ht of new banks lsion of bank
established.
of enhancing the d employment and solving lens, soft loans stors who provide )ver 50 persons -district investor ne in the North A criticism is clusion of out-ofthat it results in ts due to the cal resources and ent opportunities s. This problem r adopting certain
procedures such as giving priority to the investor in the affected areas, granting approval for new ventures taking into account the availability of resources and providing training for capacity development of the local workers.
While the banking sector is functioning with the concern of post-war development, providing low-interest loans will lead to livelihood recovery. It is stated that only high-interest loans are currently available for certain industry-related sectors and infrastructure development objectives. Further, it is pointed out that rigid procedures are followed by banks on interest rates and recovery methods. By introducing special co-ordinated soft loan model followed by organisations such as Israel Free Loan Association (IFLA) to recon Struct Israel from destructions, the recovery of losses and increase of investments can be simplified.
Various welfare schemes are being implemented through the banking sector in the North East by the government. It is also stated that these benefits have not reached the villagers. Seminars on banking services, advertisements on radio, television, newspaper, etc. will help develop the investment network of banks.
Banks release medium-scale and large-scale loans based on project reports. Entrepreneurs who are una ble to prepare the project reports in the proper manner and get approval are unable to benefit from this loan scheme. Providing opportunities to middle-level as well as high-level entrepreneurs on awareness in designing project reports and awareness on finance, technology, marketing and management will be useful.
Organisations such as Employees Trust Fund, North East Coastal Community Development Project (NECCDEP) Planning Office, Sri Ran Sri Lanka, BRAC Sri Lanka and YMCA take simplified micro
Economic Review: April/May 2011

Page 37
credit schemes to the doorstep of the people under the small employment ventures livelihood recovery. Absence of rigid conditions, customer-centred group mechanism for the granting of loans, recovery mechanism, limited administration costs, etc. provide opportunities to obtain loans at low interest rates. This has resulted in the customers of the bank to move towards micro-credit organisations. Banks, particularly those which follow traditional banking systems, need to change from traditional policies and function with the objectives of providing easy services at the doorstep of the people to sustain their existence, which is the need of the hour.
Conclusion
Commercial banks function with two conflicting objectives of maintaining solvancy and profitability. Having realised the significant contribution of the banks in the post-war development, more attention needs to be focused on the view of banks maintaining
solvancy. But, S private banks fl objective of high p show hesitation i to people living u. They are interes investment assist to ensure recover as well as profit. this situation is banking sector ( successfully to development of th East,
Acknowledgeme
The writers of t express their
Muthukrishna Sa Principal Researc Pedro Institute of
providing sug comments. Ourg to Dr. S.
Amalanathan, th Chief Minister, E Council, for his the designing of are also obliged Bank Managers, Provinces for prov necessary data.
Contd. from page 12
products could be used to reach out the financially-excluded low-income households in the remote villages. Our survey reveals that a fair proportion of the households, even in the ultra-poor group, have some knowledge about e-banking and emoney. But, the application of such modes is rather low, even among the richest households. ATMs are the most popular type of e-banking.
It is widely recognised that mobile applications are likely to improve the socio-economic conditions of the people at the base of the pyramid in developing countries. As in the case of many other developing countries, availability of cheaper mobile phones and lowcost prepaid phone cards have led to an exponential growth of mobile telephony in Sri Lanka. While the people at the bottom of the pyramid have been increasingly using mobile phones, a vast majority of them remain unbanked or underbanked in Sri Lanka. If they use mbanking, they would be able to overcome the opportunity costs
- Economic Review: April/May 2011
relating to geog bank branches.
The objective of 1 explore the pot mobile money sys to extend financi poor so as to
economic activitie the study revea mobile phones penetrated in Sri last decade cove where there is a lack of access to institutions, they for financial
payments. As a r has been losing use nobile ph financial facilities do not have a finance. The stud there is conside popularise mobil in the country iı the extensive
phones. The la about mobile b. major impedimer

tate as well as inction with the rofitability. They n granting loans nder poverty line. ted in providing ance to the elite y of their capital
It is only when changed, the could contribute
the post-war le North and the
αES
his article also thanks to Dr. rvananthan, The her of the Point
Development for gestions and ratitude also goes ith am parapillai e Secretary to the astern Provincial moral support in this article. We
to the selected in the North East riding us with the
References:
Central Bank of Sri Lanka (Various years). Annual Reports
Central Bank of Sri Lanka (2009) Statistics (http://www.cbsl.gov.lk/ htm/english/08 stat/s_6.html)
Department of Census and Statistics (2010). www.statistics.gov.lk.
Department of Censes and Statistics (2010). Press Note on Annual Estimates of Gross Domestic Product (GDP) 2010, www.statistics.gov.lk.
Economic Review (2010), "Development of North & East of Sri Lanka”, 35 (11&12) February–March, Colombo.
Sarvananthan Muttukrishna (2008). The Economy of the Conflict Region: from economic embargo to economic repression, Point Pedro (Sri Lanka): Point Pedro Institute of Development.
Sarvananthan Muttukrishna (2007). Impact of Security Measures on Livelihoods in the Eastern Province: A Pilot Study, PPID Working Paper Series, No.8, December, Point Pedro Institute of Development, Point Pedro.
The Israel Free Loan Association -
IFLA http://WWW.freeloan.org.il (access on 18.02.2011).
raphic access to
his study was to ential of using terms in Sri Lanka all facilities to the smoothen their ls. The findings of l that although have rapidly Lanka during the ring rural areas cute poverty and ) formal banking are hardly used
transfers and esult, the country
opportunities to ones to extend s to the poor who ccess to formal y also reveals that rable potential to e money systems the backdrop of
use of mobile ck of awareness anking acts as a ut to the expansion
of mobile money systerns. The application of mobile banking is largely limited to commercial bank customers in Sri Lanka, making it an additive model. Our focus group discussions reveal that most of the bank customers are unaware of such facilities. A major reason for this could be that mobile banking is not widely publicised. In Sri Lanka, the mobile phone operators are yet to launch mobile transaction systems. The mobile transactions platform needs to be harnessed in the country without further delay to overcome the problem of financial exclusion in the country.
References:
Central Bank of Sri Lanka (2009) Annual Report, Colombo.
Colom bage Sirinevan (2010) Financial Inclusion in Sri Lanka: A Macroeconomic Perspective, The Open University of Sri Lanka, Monograph 3, Nugegoda.
Department of Census and Statistics (2006/07). Household Income and
Expenditure Survey Report, Colombo.
35

Page 38
The Role of State Bar Economy with Spec:
People's Bank
Abstract
uhich uas established on l
July 1961, completes 50 years of valuable service to the nation. The setting up of the People's Bank gave an entirely reu dinnersdor to banking activities in Sri Lanka. It has been a long journey since then and the Barak has groun in size and stature to encompass every area of present-day banking activity and has carved a distinct identity of being Sri Lanka's Prender Public Sector Barc. The purpose of this paper is to examine the role of state banks in the Sri Lankan economy with special reference to the People's Bank. Throughout the years, the Bark has continued to demonstrate that it is tightly woven into the social fabric of the Sri Lankar people, and in a larger sense, into the economy. To cater to the needs of different types of custoners and neet the future challenges, the Bank need to identify neup business niches, to implement innovative strategies and to capture neu market opportunities. It will be necessary for the Bank to reconcile economic efficiency with social equity to achieve growth which will have a tang ble impact O disadvantaged sections of the society.
I 2011, the People's Bank,
Introduction
As reported by the Central Bank of Sri Lanka (CBSL), Sri Lanka’s economy grew by an impressive 8 per cent in 2010, reflecting a fast
recovery from the in 2009 and movi sustainable grow sectors of the ec
financial Se demonstrated a performance in 20 by the peac environment,
investor confide macroeconomic gradual recover economy from on recessions in histo
The contribution sector and the fil GDP (Gross Dom Sri Lanka, 59% an. in 2010 reflects t the two sectors Today, one of th segments in Sri I is the financial manifested in d money and capita the volume of tı expanded consic degree of sophisti markedly. The fir Sri Lanka mainly ( finance compani providing institu microfinance inst companies, insur primary dealers, dealers, investin margin prov underwriters, unit and pension fun sector accounting the financial syst continued to domi sector in Sri Lank
Today, the role expanded like nev become the mos
36

nks in the Sri Lankan ial Reference to the
setback suffered ed to a high and th path. All key onomy including vices Se C tOir
commendable 110, underpinned 2ful domestic and improved nce, favourable conditions and y of the global e of the deepest ry (CBSL, 2010a).
of the services
nancial sector to estic Product) in ld 9% respectively he importance of
to the economy.
e faster growing Lanka's economy sector. This is evelopments in 1 markets, where ansactions has ierably and the cation has grown nancial system in consists of banks, es, other credittions (including itutions), leasing ance companies,
stock brokers/ nent managers, iders, stock trusts, provident ds. The banking for 52 per cent of em’s total assets nate the financial a (CBSL, 2010b).
of banks has
er before and has | integral part of
Dr. Upalinie Ajitha Tennakoon
Department of Economics, University of Kelaniya.
every society. Banks offer a wide range of products and services, customised to cater to specific needs of different categories of custoners. The se ranged fron Currert a CCOlu In tS, savings products, term deposits, foreign currency deposits, trade, finance, leasing, factoring, personal lending, pawning, housing, credit/debit
cards, inward remittances, investments in government securities, fund management,
project finance and special lending schemes for areas such as fisheries, agri-business and small and medium enterprises. If the banking system in a country is effective, efficient and disciplined, it brings about a rapid growth in various sectors of the economy. The role of banking in the economy thus can be considered to be very significant and imperative.
The purpose of this paper is to examine the role of State banks in the Sri Lankan economy with special reference to the People's Bank. This paper is organised into four sections. The next section presents a brief historical overview of the domestic banking industry in Sri Lanka with special reference to the State banks. The second section discusses the outcomes of financial reforms in Sri Lanka that have been introduced since the latter part of 1977 to create an efficient and competitive market in brief. The third section analysis the role of People's Bank in the
Economic Review: April/May 2011

Page 39
economy considering its performance, risk management, achievements and innovations. The last section presents conclusions of the analysis.
Historica. Overview
During the mid 19th century, the Ceylonese had no access to the foreign Banks (mainly British and Indian Banks), and it was the Nattukottai Chettiar who provided the Ceylonese with all banking facilities, and they were regarded as the official money lenders to the nation (Weerasuriya, 1973). There was no direct communication between the bank officials and the Ceylonese business community. The village farmers who cultivated rice, vegetables, and other subsidiary food crops were entirely dependent on the village moneylenders, indigenous bankers, pawnbrokers, traders and merchants, landlords, friends and relatives who acted as intermediaries in the unorganised credit market. Interest rates that prevailed in the unorganised market were higher than those in the organised market. Therefore, a necessity arose to establish a national bank to cater to the requirements of the local entrepreneurs and to provide financing on a progressive scale to diversify the economy.
Realising the fact that the Nattukottai Chettiars could not continue in their role as money lenders and financiers to the nation, the Banking Commission appointed by the Governor in 1934, headed by Sir Sorabji Pochanawala recommended to the government the establishment of an indigenous Government-sponsored commercial bank to cater to the needs of Ceylonese agricultural and business interests. The State Council of Ceylon approved this recommendation, and the Bank of Ceylon (BOC) was established on lst of August 1939, under Bank of Ceylon Ordinance (No. 53 of 1938), as Sri Lanka's first State-owned commercial bank.
- Economic Review: April/May 2011
In 1961, the esta People's Bank, ul Bank Act No.29 of
sector bank and til
of the Bank of C
facilitate the nati efforts of the col turning point il banking in Sri La inspired by a responsibility, banks- the Bank People's Bank hav priorities and ob rapid growth of a industries and ex employment level of new entre development of ba much of the Sri
these two state b a major role in t times controlli fourths of depos. the banking sys continue to contr assets and depos. system today. Th the right to have on reasonable
discrimination to Lanka, irrespectiv religion.
Financial Refor:
After nearly 30 looking econom financial repressi policy reforms pa introduced in 19 structural chang deregulation o services sector, economic reforn Prior to that economic stagn repression, polic excessive govern) impeded the de efficient and a system in the co reforms impleme: during the past intended to cre competitive and d system, while financial stability

blishment of the nder the People's f 1961 as a public he nationalisation eylon in 1961 to onal development untry, marked a n the history of Inka. Having been larger social the two state of Ceylon and the fe served national jectives such as agriculture, small ports, increase of s, encouragement preneurs and ckward areas. For Lanka's history, anks have played he economy - at ng over threeits and assets of
tem - and they
ol nearly half the its of the banking uey have ensured access to credit
terms without
all people of Sri re of class, race or
years of inwardlic policies and on, the economic |ckage which was 77 included some ges in relation to f the financial along with other ns in Sri Lanka. policy change, ation, financial y distortions and nent intervention velopment of an viable financial untry. Financial nted in Sri Lanka
two decades were ate an efficient, leveloped financial strengthening r (CBSL, 2000).
Among the significant measures that have been taken to deregulate the financial sector since 1977 include interest rate deregulation, introduction of market-oriented credit allocation, relaxation of market entry for foreign and domestic banks, implementation of institutional reforms, and improvement of supervisory framework including appropriate legislative measures to safeguard the financial system (Edirisuriya, 2007). A number of policy changes were introduced since then, and the process has been continuing according to the changing domestic and international environment.
The banking sector, which had been rigidly controlled, was liberalised. Foreign banks were encouraged to enter the Sri Lankan financial market and were permitted to open branches in Sri Lanka. In addition, the domestic private sector was allowed to engage in commercial banking. New types of financial institutions, such as, money brokers, venture capital companies, merchant banks and unit trusts were permitted to commence operations. The removal of barriers to entry broadened the financial market, and increased efficiency through competition. S.
The two State banks were recapitalised and granted greater autonomy in their commercial operations to restore their financial viability and profitability (CBSL, 2000). Those drastic policy changes were affected to expand the scope of the banking industry as well as to increase the number of firms in the industry. The financial services industry thus supported the continued expansion in economic activity in the country. The expansion of the financial services has shown in the Table - 1
As at the end of 1979, there were 14 banks - consisting of 4 domestic banks, and 10 foreign banks. The domestic banks consisted of two state banks and two private banks,
37

Page 40
namely, the
Table 1: Composition of the Bankin
Commercial
Type of Banks Num Bank of Insti C e y l on (established Licensed Commercial Banks
1969 aS State banks the first Private domestic banks private bank) Foreign banks and the Licensed Specialised Bank H a t t O n State banks Nation a 1 Private banks В а n k Banking Industry (established in 1970 as Source: Central Bank of Sri Lanka, (20 the second
private bank). The number of foreign banks increased to 28 at the end of 1982 while 4 indigenous banks were permitted to open branches in outstations. Thus, the competition became acute as large portion of the financial market share hitherto held by the State banks were acquired by the new-conners to the banking industry.
In 2000, the total number of commercial banks operating in the country was 26 consisting of 2 state banks, 8 domestic private banks and 16 foreign banks. The total number of bank branches stood at l,084 at the end 2000. The increase in branch network was mainly through opening of new branches by the domestic banks. Accordingly, the total branch network of donestic banks reached 1046 while foreign bank branches increased to 38. In 2009, the total number of branches of commercial banks rose to 2,214, consisting of 2000 domestic bank branches and 214 foreign bank branches. The state banks had the largest number of branches; numbering 1,175, consisted of 679 People's Bank branches and 496 Bank of Ceylon branches. The distribution of commercial banks branch network for the period of 2000-2009 is given in Table 2.
The banking sector, which is the most dominant and systemically important sector in the financial system, has shown a significant expansion during the last two decades, reflecting the increase in
38
financial transac the growing econc 2010, the numbe at 31 comprisi commercial bank licensed specialis There were 1,932 965 extension off banking outlets by This network
strengthened by Teller Machines ( an increasing re
Table 2: Bank E.
Licensed Conn
Domestic Banks
Bank of Ceylo People's Ban
Commercial E
Hatton Natior
Sampath Banl Seylan Bank Other (b) Foreign Banks Population per B
Commercial Ban
per 100,000 Per
No. of Commerc
Domestic Banl
Foreign Banks
(a) Includes mai Pawning Centres
(b) Includes Uni Ltd., Nations Tri Vardhana Bank
Source: Central

Sector as at 30 September 2010
er of ! Number of Total Assets | Market share
tutions Main Rs. Bin of industry (%)
Branches
2 1,408 2,809 835
2 640 1,156 34.4
9 722 1,248 37.
46 405 12.. O
9 468 553 16.5
6 405 47O 14.O
3. 63 83 2.5
B 1,876 3,362 OO.O
1 l).
ions to facilitate Imy. As at end of r of banks stood ng 22 licensed is (LCBs) and 9 ed banks (LSBs). bank branches, ices, 2,977 other r the end of 2O1, O. was further 2,006 Automated ATMs) indicating :liance on card
based payment modes by the banking community (CBSL, 2010a). Sri Lanka now has 9.1 branches for every 100,000 individuals as opposed to the global median of 8.4 branches for every 100, 000 individuals (CBSL 2011). Overall, the banking sector experienced solid growth maintaining its soundness and profitability, with increases in the asset base, loans and advances portfolio, investments and deposit
tranch Network of commercial Banks 2000-2009
Item 2OOO 2005 2008 2009
ercial Banks (a) 1,084 1,627 2,071 2,214
1,046 1,585 1857 2,000
341 390 455 496
k 343 6O2 653 679
lank of Ceylon 81 140 177 179
al Bank 12O 150 177 82
39 84 115 137
90 14 114 14
32 105 166 23
38 42 214 214
ank Branch 6,642 5,293 4,369 4,201
k Branches 5.7 8.3 10.2 10.8
SOS
al Banks 26 22 22 22
KS 10 11 11 l
16 11 11. 1.
n branches and other extension banking offices except , Student Savings Units and mobile banks
on Bank of Colombo
Ltd., Pan Asia Banking Corporation
st Bank PLC, National Development Bank PLC and DFCC
Ltd.
Bank of Sri Lanka, (2010c).
Economic Review: April/May 2011

Page 41
Table 3:
Number of State Bank Branches by
Item Western Central Southern No1
Bank of Ceylon 134 58 55 3 People's Bank 2O3 90 83 3
Total 337 148 138 6
Source: Central Bank of Sri Lanka, (2010c).
mobilisation in the face of external shocks and challenging domestic macroeconomic conditions (CBSL, 2010a).
The Role of the People's Bank
This year, the People's Bank (known as the Pulse of the People), which was established on 1 July 1961, completes 50 years of valuable service to the nation. It is a licensed commercial bank established under the Banking Act No. 30 of 1988. The setting up of the People's Bank gave an entirely new dimension to banking activities in Sri Lanka. By statute, the purposes of the Bank shall be " to develop the co-operative movement of Ceylon, rural banking and agricultural credit, by furnishing financial and other assistance to co-operative societies, approved societies, cultivation committees and other persons” (People's Bank Act No. 29 of 1961, Section. 4).
As stated, the Vision of the Bank is to be the Bank of the aspiring people of Sri Lanka, empowering people to become value creating, competitive and self-reliant. The Mission of the Bank is to take pride in providing an excellent service for customers in the most caring, responsive and professional manner; generate benefits for the national economy whilst being independent and commercially viable; and create opportunities for employees to benefit from their high performance by becoming value-creating, skilled, selfconfident and professional individuals who are also team players (People's Bank, 2009)
The People's Bank pursued an aggressive branch expansion
- Economic Review: April/May 2011
programme fro1 bringing the tot branches to 100
1971 and expand In 1993, the tota branches stood People's Bank
branch networ covering all provi (Table 3) and ove customer base. ' of employees sto end of year 200 2009). In 2010, 283 service cent were online and
provide fast and nation. Bank's A numbers in 201C 365 days 24 hour of the country. T its expansive
banking network over 105 countri
Historically, the l been one of the that have consist services to peo remote areas of
Co-operative Rul scheme, which f meeting the spec households, was 1964 with the he
Bank. At the in accounting and
of CRBs were sl Bank and as a People's Bank iiI credit to rural co
In 1967, the Bank Agriculture C becoming the pio small farn Comprehensive Scheme (CRCS) 1973 to provide and production c

rovince by end 2009
thern Eastern North
North Uva ;at;&; A
Vestern Centra gamuwa Islan 5 41 47 40 37 45 493 2 53 72 44 45 57 679 94 19 84 82 102 1,172
n the beginning, al number of its within a decade in ed to 300 in 1982. l number of bank
at 330. Today, has the largest k of over 680, ncials of Sri Lanka 12 million strong The total number od at 8,863 at the 9 (People's Bank, 266 branches and res totalling 549 interconnected to easy service to the TM network 330 in l, serve the people s in all 24 districts he Bank also has
correspondent numbering 300 in
eS.
People's Bank has domestic banks ently provided its ple in the most the country. The ral Banks (CRBs) ocused mainly on ific needs of rural s inaugurated in :lp of the People's itial stages, the financial systems upervised by the consequence, the litroduced micrommunities.
commenced a new redit Schenne, neer lender to the
Se C tOr. The
Rural Credit was launched in both consumption redit facilities and
continued to function as the major source of institutional credit to the rural Sector. The New Comprehensive Rural Credit Scheme (NCRCS) was introduced in 1986 with several new features and strategies for lending in rural areas for agriculture. One of the objectives at that time was to bring down the transaction cost of credit to small borrowers. The Bank also extended its credit facilities to small-and medium-scale enterprises and industries (such as agriculture, agro based industries, self-employment category industry, trade and services) under the Poverty Alleviation Micro Finance Project (Revolving Fund) refinanced by Central Bank of Sri Lanka and Poverty Alleviation Small Enterprise Development Loan Scheme Refinance by National Development Trust Fund.
The People's Bank Provides credit facilities to entrepreneurs who are being trained and introduced by the 'Vidatha Resource Centers' by the Ministry of Science and Technology under the Vidatha Loan Scheme (Technology to the Village), to uplift the economic level and skills of the rural people. Also, the Bank implements Vanitha Navodya’ loan scheme - under the sponsorship of the Ministry of Child Development and Women's Empowerment and financial contribution from the United Nations Development Fund for Women (UNIFEM), for women who faced with economic difficulties due to natural disasters (as flood, landslides, typhoons, hurricanes etc.), and due to the war - like situation prevailing in certain areas in Sri Lanka. Table 4 shows the micro-finance and other Government- directed loans and advances of the People's Bank.
39

Page 42
Table 4: Government Directed Loans & Advances
20 (Rs
Microfinance 285 Agriculture and other development loans 1,647 Housing loans granted to government servants 9,364
Source: People's Bank, (2009, 2010).
The People's Bank has introduced various specialised services, such as savings accounts, current accounts, fixed deposits, foreign currency accounts, business, personal and home loan facilities, leasing facilities, and credit card services to exclusively cater to high-net-worth customers. The Bank offers innovative savings schemes for infants (Nidahase Upatha and Isuru Udana), children (Sisu Udana), school leavers (Yes Future Stars), young executives (YES), women (Vanitha Wasana), senior citizens (Parinatha), pensioners (Visrama Suvaya), Government sector health personnel (Suuva Sevana), internet banking users (AMEX), home dreamers (Jaya Nivasa), Self
employed peop agriculturists ( migrant worke teachers (Guru S. of facilities, customised to su needs of the acco Bank also pro financial facilitie projects such as U Nagenahira N 'Reawakening C rebuild shattered People in North country.
Assets and dept
The People's bank largest asset base As shown in Tal
Table 5: Composition of Assets of the People's E
in 2009 and 2010
Item 2O09 2010 C
(Rs. Mn) (Rs. Mn) o%
Cash in Hand 8,975 8,997 Balance with Central Bank 22, 717 26,739 1' Due from banks and other 41,356 37,359 financial institutions Investments 95,729 96,653 2 Loans and Advances (net) 283,760 357,336 2 Other Assets 23,708 20,532 2 Total Assets 476,245 547,616 1
Peoples Bank, (2010).
Table 6: Composition of Liabilities of the Peopl
Bank in 2009 and 2010
ten 2009 2010 Chan Total Deposits 396,157 462,140 16. Demand 37,352 40,617 8. Savings 174,735 203,003 16. Time 181259 215, 107 8. CD 8, Others 2,811 3,411 18. Total Borrowings 41884 44,132 5. Other Liabilities 20,403 20,505 1.( Total Liabilities 458,445 526,777 4.
Source: People's Bank, (2010).
40

of the People's Bank 2008-2010 for around 20 8 2009 2OO percent of the total oooo! Rs...oooo (Rs...oooo) o Py o o
2010. Meanwhile 583 237,694 307,725 loans and ,661 1,142,836 2,356,863 advances, which 049 9,521,640 14,646,427 represented the
le (Surathura), Asuen na), and rs (Videshika), 2tha) with a host which can be it the individual unt holders. The vides exclusive s under various turu Wasanthaya, a uvoda ya and f the North' to livelihoods of the and East of the
sits structure
holds the second 2 in the industry. ble — 5, the total
assets of Bank the Bank recorded a significant ange growth of - 5% in 0.2 2 O l O 7.7 w h i ch 9.7 ended at
RS. 547
7.4 Bn, aS 5.9 compared 3.0 to the so growth of a round
14% in t h e e's banking industry. ge % || This could 7 b. е 7 attributed 2 to the 7 significant 7 - growth of 27.4 in - investments, 9. w h i ch accounted
major portion of around 65% of the Bank's assets, also displayed a significant growth of nearly 26% in 2010. At the end of 2010, the Bank had loans and advances (net) exceeding Rs. 357 Bn. as against Rs. 283 Bn, as at end 2009, an increase of 24 percent over 2009.
Deposits continued to be the main source of funding of the Bank accounting for 88% of total liabilities. The value of total deposits of the Bank increased by 17% surpassing Rs. 462 Bn in 2010, which was significant when compared to the 22% increase totalling 396 Bn increase in 2009, (People's Bank, 2010). The total increase in deposits was directly influenced by the growth in rupee Savings Deposit base by 16%, which ended at Rs. 203 Bn, despite intense competition from other commercial banks and term deposit demand driven by high yields. The rupee-Fixed (Time) Deposits which represent a significant portion of the deposit portfolio grew by 19 percent over 2009, ended at 215 Bn in 2010. Denand account balances closed at Rs. 40.6 Bn contributed primarily by the expansion of its branch networks. Current and savings accounts over total deposits averaged at 53% to total deposits in 2010 when compared to the average of 54% in 2009. The structure of deposits has given in the Table 6.
At the end of 2010, the growth of loans was nainly in respect of the pawning, construction, trade, other services sectors, and agriculture and fishing with annual growth of 34%, 19%, 18%, 10% and 8% respectively (Table 7). The Pawning business has grown to become an integral part of the loans and
Economic Review: April/May 2011

Page 43
advances sector of the Table 7: Sector-wise Credi
Bank. Currently, Sector People's Bank is the
market leader in
Agriculture and Fishing
pawning and the most Manufacturing
preferred and sought- Tourism
after pawning service Transport
provider. According to Construction
the Bank 'this Traders
business yields good Financial and Business Servic
Infrastructure
returns and is a major
Other Services
ibutor to B y contributor to Bank's Credit Card
bottom line in
Pawning
addition to being very other
capital efficient,” Total
(People's Bank, 2009). The growth of credit to the services sector (including trade) and manufacturing sector was in
with the performances of these sectors in
line improved
GDP, where the services sector grew by 59% the manufacturing sector by 16% in 2010.
and
It is noteworthy that the share of total loans to the agricultural sector is less than 8%, demonstrating the Bank's lack of enthusiasm for lending to the agriculture sector. It is believed that one of the major reasons for the poverty is a low accessibility for credits by rural poor. Although there are inherent inefficiencies and vulnerabilities that have made the agriculture sector risky and costly, as a State bank, it is a responsibility of the Bank to help and restore the confidence in the minds of rural farmers by providing more accessibility towards credit and other facilities.
Capital adequacy
People's Bank has continuously increased its Capital Base (combination of Tier I & Tier II Capital as approved by CBSL under Basel I & II) with maximum ploughed-back earnings, capital from the Government and two
- Economic Review: April/May 2011
Source: People's Bank Annual
de b enture
issues to the
value of Rs. 5
Brn. In keeping with the
a gree n ent signed between
t h e
Government of
Sri Lanka, ADB ( A s i a n Development Bank) and the People's Bank, Finance injecte Bank as four tri Capital Investme Rs... 1 Bn, Rs. 1.5 for the years 200 2008 respective capitalisation conditions of People's Tai B a n k achieving
certa in performance t a r g e ti s and key performance indicators.
T h e s e strategies together t h
r e t a ii m e d
w i
Grς Tot Tot Net
Tot No. No
PrC Prs Op
Sol

: Exposure of the People's Bank in 2009 and 2010
2009 Composition 2010 Composition
Rs. Min. | % Rs. Ma. 96
34,442 11.5 29,204 7.9 21,912 7.3 20,014 6.2 4,287 1.4 3,200 O.9 257 O.1 356 O. 1 55,687 18.6 71,725 19.3 50,551 16.9 65,443 17.6 es || 5,344 1.8 4,375 1.2
605 O.2 254 O. 25,572 8.6 38,307 10.3 875 O.3 834 0.2 97.534 32.6 133,299 35.9 2,Oll O.7 1,792 0.4 299,077 1 OO 371,804 1OO
Report, (2010).
Table 8: Selected Performance indicators of the
People's Bank, 2009-2010
Indicators 2009 2010 Total Capital Adequacy Ratio (Minimum Requirement 10% ) 13.4 12.8 Tier l Capital Adequacy Ratio (Minimum Requirement 5% ) 7.7 7.9 Gross NPL. Ratio (%) 6.6 5. O Return on Assets (%) - (Before Tax) 1.4 1.7 Return on Equity (%) -(After Tax) 19.7 26.9 Capital Adequacy Ratio (%) 3.4 12.8 Statutory Liquidity Ratio (DBU) 29.9 23.4
Source: Peoples Bank, (2010).
the Ministry of d capital to the anches of Equity nt of LKR. 2 Bn, Bn and Rs. 1.5 Brn
5, 2006, 2007 and ly based on the
plan and on
earnings for the year 2009 of Rs. 1.9 Bn and the marginal growth in risk-weighted assets during the year, have enabled the Bank to reach a Capital Adequacy Ratio (CAR) of 12.8% by the end 2010 compared to 13.4% in 2009 (Table 8). This ratio was above the
le 9: Selected Financial Highlights of the
People's Bank 2009 - 2010
ten 2009 2010 Change
Rs. Ma. Rs. Min, o%
iss Income 69,049 62,532 9.4 al Interest Income 62,341 56,534 9.3 al Interest Expenses 38,414 30,635 20.2 interest income 23,926 25,898 8.2 all other income 5,331 4,939 9.4 Interest Incorne 5,332 4,939 8.2 Interest Expenses 16,879 17,670 4.7 fit before Taxation 6,076 8,771 44.4 fit after Taxation 3,320 5,206 56.8 Brating profit for the period 3,320 5,206 56.8
urces: Peoples Bank, (2009, 2010).
41

Page 44
statutory requirement of the CBSL. This is a remarkable achievement given that this ratio was negative or below 10% a few years ago.
Compared to the banking industry's Non- Performing Loan (NPL) ratio which stands at just under 9% in 2009, People's Bank's NPL remains below this average at 5.5%, in 2010 compared to 6.7% in 2009. The Bank's NPL coverage ratio is over 70% compared to less than 50% in the industry (People's Bank, 2010). Overall, the Bank achieved the highest recorded profit before tax of Rs. 8.8 B n 2010 compared to Rs. 6. 1 Bn in 2009; a 44.4% increased, certainly a great achievement given the extreme market conditions. Profit after tax is posted at Rs. 5.2 Bn, an increase of nearly 57% from the 2009 figure of Rs. 3.3 Bn. Net Interest Income was recorded at 8.2 % growth amounting to Rs. 25.9 Bn, despite a reduction in lending rates during the year and the challenging macro environment (Table 9).
Achievements
As one of the most transparent and accountable financial institution in the South Asian region, People's Bank received a SAFA (South Asian Federation of Accountants) award for the 2008 Annual Report for the first time in the Bank's history, competing with several well-known public sector entities from countries including Pakistan, India, Nepal, Bangladesh and Sri Lanka underlining its commitment to upholding highest standards. The Bank also received SAFA award for the first place in the Public Sector Category for the 2009 Annual
Report.
The People's Bank won the popular SLIM (Sri Lanka Institute of Marketing) Brand Excellence Awards - Services Brand of the Year 2009 (Gold Award) " award for the first time by the Sri Lanka Institute
42
of Marketing aj Award for the fo year in the Banki sector at the Pe 2009, in recognit to accomplish responsibility anc lives of Sri Lanl
Bank also won th Brand of the Ye presented at th People's Award consecutive year.
Moreover, the Bar initiative won the E Implementation Award for Sout Middle East fron IBM at the Banl
Summit held in P
2009.
These achieveme Bank to boost its
year 2010, raisir AA- (positive) frc Fitch Rating Lar augmented by AA Ratings Lanka Ltd strong financial p capital base, p assets quality.
Innovations
The array of finan services and deli
the Bank broa
introduction of n
Information and Technology (ICT)- and services, s' banking, mobile (joining with Dialc banking and SM Banking syste. extended acro network, incre number of interli
461 in 2010. This way of providing urgently-required in a far lesse
conventional bra

ld the People's rth consecutive ng and Financial ple’s Awards in on of its services
the in uplifting the an people. The People's Service ar 2010 Award
e SLIM Nielson
s for the fifth
social
k's Core Banking Best Core Banking and Deployment h Asia and the
Silverlake and king Technology erth, Australia in
nts enabled the rating during the g its position to m A (stable) by nka Ltd, further A rating by RAM , reflecting Bank's rofile in terms of rofitability and
cial products and very channels of dened with the
ew schemes and
Communication - based products uch as internet
phone banking og Axia), Palm Top S banking. Corem was further
ss the "branch asing the total nked branches to
was an innovative
, quick access to banking facilities r time than a
nch. There was a
significant shift towards card-based payment modes and ATM facilities. With these innovations, Bank can
be relationships and service standards
developed custom er
together with improvements in delivery timing.
Challenges Ahead
The financial liberalisation and
continuous deregulation has made the financial market in Sri Lanka
extremely competitive with greater autonomy, and operational flexibility. At the same time, globalisation of domestic banks has also been facilitated by tremendous advancement in information and
communications technology. In the future, banking will be driven more
of
telecommunication systems. These
technology and
increased convergences present great opportunities for banking institutions to broaden their
activities over potential markets.
the banks
understand the market dynamics,
Therefore, who
perceive threats, anticipate volatility, show high degree of professionalism and dynamism in their functioning and respond promptly to the market needs would
sustain and prosper.
Given the new environment, the State banks in Sri Lanka can't
remain unaffected by the changes round and challenges before then. Therefore, State banks need to restructure themselves by bench marking of service standards to improve competitiveness and productivity. Moreover, the State banks must improve the capacity and qualifications of officials and experts and renovate working methods and business thinking and expanding its capital scale to improve the quality of services and
business efficiency.
Economic Review: April/May 2011

Page 45
Although the People's Bank has shown financial performance over the last several years, it is indeed important to take
several steps to improve the
impressive
competitiveness and efficiency of the Bank to meet the future challenges and continue the market leadership. The enhancement of customer service; introduction of innovative and diversified products, application of advanced technology; implementation of Basel III; improvement of risk management systems; implementation of new accounting standards; enhancement of transparency 8, disclosures; and compliance with KYC (Know Your Customer) aspects are a few broad challenges faced by the Bank today. These challenges require the Bank that has its own dynamism and agility to respond proactively to the changing requirements of the economy, as it threshold of completing the golden jubilee. Thus, the
innovations,
stands on the
vision, mission, and social commitments of the People's Bank can convert these challenges into
opportunities.
In addition, the excluded segments of the population require products which are customized, taking into consideration their varied needs. Their banking requirements being small, the issue of servicing and delivery in a cost-effective manner assumes significance.
At the same time, the State banks in Sri Lanka need to go further to improve their efficiencies to bring them up to the standard of international financial markets. Therefore, both the public and private sector banks should be fully prepared to face the new global standards referred to as Basel III which will be implemented in phased manner over 5 years from 2013.
- Economic Review: April/May 2011
Conclusions
The Sri Lankan has experienced s over the last fou consequence of d financial servic
reforms aimed to
productivity and degree of compet market. The State
been the back
Lanka's bankin their inception, th a driving force bel small to medium
major cities to across the countr fifty years, the P evolved and un
changes based on social needs of
forces of economi
Sri Lanka. Today, has emerged as a
growing bank wit stability, and a share. Support technology, the
rapid strides in p and delivery, th quality of custo. stronger capital I retention of earni
risk manage) supported by
regulatory an framework, has p a stronger footi impact of the
slowdown.
Nevertheless, customer servic technology, inp management diversifying prod to maintain the
of the Bank.
finance has beer
factor in ena transform theil employment act

banking industry (ructural changes r decades, as a :regulation of the es Sector. The
enhance both the :fficiency and the ition of financial banks have long bone of the Sri
g system. Since ey have served as hind the growth of businesses from rural outposts y. During the past eople's Bank has dergone various the economic and the people and c development in the People's Bank dynamic and fasth a firm financial
leading market ed by the latest Bank has made
roduct innovation ereby improving mer service. The
bositions, prudent ngs and improved
rhet systems an enhanced
d supervisory laced the Bank on
ng to absorb the global economic
:n han cement of 2, innovations in rovernent of risk
systems, and ucts are necessary market leadership Since access to
seen as a critical bling people to
production and vities and to exit
poverty, the Bank needs to look towards the vulnerable and other excluded sections of the population as bankable, reconciling economic efficiency with social equity. And that is the key challenge.
Relerences:
Central Bank of Sri Lanka (2011), Road Map: Monetary and Financial Sector Policies for 2011 and Beyond, Colombo.
Central Bank of Sri Lanka, (2010a), Annual Report, Colombo.
Central Bank of Sri Lanka, (2010b), Financial System Stability Review, Colombo.
Central Bank of Sri Lanka, (2010c), Economic and Social Statistics of Sri Lanka 2010, Colombo.
Central Bank of Sri Lanka (2005), Annual Report, Colombo.
Central Bank of Sri Lanka (2000), Annual Report, Colombo
Edirisuriya, P. (2007), "Effects of Financial sector reforms in Sri Lanka: Evidence from the Banking Sector”, Asia Pacific Journal of Finance and Banking Research, Vol. 1. NO. 1. PP. 45-64 ܟ
People's Bank, (2009), Annual Report, People's Bank Colombo.
People's Bank, (2010), Annual Report, People's Bank, Colombo. People's Bank, Web site: http:// WWW.peoplesbank.lk/
Weerasooriya, W. S., The Nattukottai Chettiar merchant bankers in Ceylon - 1973 -Tisara Prakasakayo, Dehiwala.
Footnote:
1. Sisu Udana is one of the most successful student-oriented products of the Bank conceptualised to reach beyond the conventional banking ethos. The scheme enfolds the lives of over two million children, resulting in a notable mobilisation of Rs. 3 Bn during the year 2009.
43

Page 46
Features
Fiscal Devolution: Towards Conflict Res
Introduction
or too long, the political
processes in Sri Lanka to
resolve minority grievances have been preoccupied with the nature of the state (unitary versus federal), unit of devolution of political and administrative power (village, district, or province), language, land, police, and other administrative issues. Very little discussions have taken place regarding the division of financial/ fiscal powers between the centre All the previous political processes have failed on one political and/or administrative issue or the other.
and the peripheries.
Even the externally-imposed provincial council system under the Thirteenth Amendment to the Constitution has not lived up to the expectation of the minority communities because of the lack of devolution of land, law and order, and fiscal powers. Though land, and law and order power devolution continues to be conte sted, the matter of fiscal devolution has not attracted the attention of the protagonists or the opponents of the Thirteenth Amendment thus far. So, this window of opportunity should be made use of to promote fiscal devolution as a stepping stone towards a durable political solution to the grievances of the minorities, particularly the Tamils of the North and the East of Sri
Lanka.
Therefore, this paper would analyse the current fiscal architecture in Sri Lanka and propose a devolved fiscal set-up that could possibly be a stepping stone towards a durable political and economic solution to the enduring ethnic conflict in Sri Lanka.
44
Public Finance
Whilst the govern a percentage domestic product government ex percentage of GDP Therefore, the (r deficit in 2009 wa of the GDP Fu public debt as a was 86% in 2009 Sri Lanka, 2009 total governme inadequate to me expenditures of th has been the cas the annual servic debt. In other wo recurrent expen entire capital ex government and a debt servicing a borrowed money.
In these precario of the public
imperative t government ex increase governm national, provir levels. The curr
revenue as a prop in Sri Lanka (15 lowest among th in come countrie increased to at lea mobilisation by t! 1ocal goverη Πner compared to
mobilisation o: government (se section); therein to increase public fiscal devolution.
Two-thirds of t revenue accrues f (indirect) taxes accrues from inct (see Table 1). consumption tax and income taxe because the rate: taxes are equal to goods and servic
 
 

A stepping Stone solution in Sri Lanka
Dr.Muttulkrishna Sarvananthano
reInt TeVenue aS pf GDP (gross ) was just 15%, ben diture as a was 25% in 2009. lational) budget ls little over 10% rther, the total share of the GDP (Central Bank of ). Moreover, the nt revenue is let the recurrent he government (it e since 1989) or ing of the public ords, part of the diture and the penditure of the part of the public are paid for by
us circumstances finance, it is rationalise penditure and 2nt revenue at the lcial, and local ent government ortion of the GDP %) is one of the e lower middles. It has to be ast 20%. Revenue ne provincial and lts is miniscule
the revenue f the national e the following lies the potential revenue through
he government rom consumption
and just 20% one (direct) taxes
Theoretically, es are regressive s are progressive, s of consumption all who purchase es irrespective of
Principal Researcher, Point Pedro Institute of Development.
their income levels whereas the rates of income tax rise as the income of individuals or businesses rise (i.e., the amount of income tax is proportionate to the amount of income; higher the income, higher the income tax one pays - the principle of "ability to pay).
Therefore, -it is high time the government thinks out of the box to fix its fiscal deficit by transforming the nature, content and extent of the fiscal architecture of the national government vis-a- vis the provincial and local governments. The Presidential Tax Commission in deliberations during 2009-2010 could, hopefully, come up with some innovative ideas to narrow the gap between government re Verne and expenditure and thereby practice fiscal prudence (in place of fiscal profligacy of the post-1977 period). If need be, annendments to the present Constitution should be made, for which the necessary parliamentary majority is within the grasp of the present government.
Provincial Finance
The total provincial revenue (from all eight provinces) has been between 3.5% (1999) and 4.3% (2004) of the total revenue of the national government during the 1999-2004 period. Whilst the total provincial revenue as a percentage of the national GDP has been constant at 0.6% during 1999-2004 period, the total revenue of the national government as a percentage of the GDP has consistently dropped from 17.7% in 1999 to 15.3% in 2004 (Waidyasekera, 2005).
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Page 47
On the other hand, the total provincial expenditure (by all eight provinces) has been between 10.2% (1999) and 11.7% (2003) of the total expenditure of the national government during the 1999-2004 period. In absolute amount, for example, while the total provincial expenditure in 2004 was LKR. 57 billion, the total provincial revenue was LKR.14 billion in 2004 (Waidyasekera, 2005).
Internationally, the s u b - In a t ii o n a li government revenue as a percentage of the central government revenue has been high as circa 50% in Brazil
Table 1: Compositior
Taxes on Income (direct) Personal
Corporate
Tax on interest
Taxes on Expenditure &s P VAT
Sales Taxes
Import duties
License fees Stamp duty/Cess levy/SRL/ SCL/NBT & other
Debit tax Port & Airport development I
Profits, Dividends as Inter
Gross Receipts of Trading Railways Posts
Other Current Receipts National Lottery Other
TOTAL
Source: Central Bank of Sri Colombo
(in 1998) and India (in 1999), moderate in Malaysia (15.4% in 1997) and Thailand (17.0% in 2002), and low in Indonesia (3.2% in 1993), Philippines (2.7% in 1993), and Sri Lanka (4.3% in 2004) (Waidyasekera, 2005). The subnational government expenditure as a percentage of the central government expenditure has been high as 88.7% in India (in 1999), moderate in Indonesia (13.7% in 1993), Malaysia (12.4% in 1997), and Sri Lanka (11.7% in 2003), and low in Philippines (5.5% in 1993) and Thailand (6.0% in 2002) (Waidyasekera, 2005) The foregoing international comparison data is based on different years and therefore should be considered cautiously.
During the period 2000-2004, provincial revenue growth has been higher than the provincial GDP growth in all but the North-East and Uva provinces (Waidyasekera, 2005). For instance, the total revenue of the North-East Provincial Council in 2004 (LKR. 141 million) was only 0.08% of the Provincial GDP of the combined North-East Province in 2004 (LKR. 1 66,200 million) (Waidyasekera, 2005).
Hence, the Provincial Councils in Sri Lanka depend heavily on the
transfers from government. For el total provincial r eight provinces billion, total trans provinces by government amou. billion in 2004 (s Finance Commis assess the needs a financial trans national goverl provincial gove published only on (2004) in the past which is an inc lacklu stre in the iI the Thirteenth An
Constitution.
There is an argi second tier of g( provincial counc costly exercise wit functions and very the provinces (F 1997). It is true t Ministry of Local
Provincial Council or USD.0.90 billio. largest spending I Ministry of Finan debt repayment) (I USD - 7 , 23 billi: (including Public and Order) (LKF
- Economic Review: April/May 2011

of Government Revenue - 2009
re LKR Mor Percentage
139,558 2O 28,229 66,751 44,578 roduction (indirect) 4,77,704 67
1,71,51O 97,604 79,810 3,269 RIDL/ 81,190
8,036 levy (PAL) 36,286 'est 41,025 Enterprises 8,566 4,020 4,546
44,526 6 1,542 42,986
7, 1,379 OO
Lanka, Annual Report 2009, Statistical Table 91,
the national kample, while the evenue from all
was LKR. 3.. 6 sfers to all eight the national nited to LKR. 38.5 ee Table 2). The ssion set up to and disburse the fers from the nment to the 2rnments has e Annual Report twenty two years, lication of the nplementation of mendment to the
unent that the overnment (i.e., cil system) is a h overlapping of y little benefits to He wavitharana, hat in 2009, the Government and s (LKR.102 billion n) was the fourth ninistry after the ce (largely public „KR. 83 billion or ion), Defence Security and Law R. 212 billion or
USD. 1.85 billion), and Public Administration and Home Affairs (LKR. 106 billion or USD. O.93 billion).
However, it has to be noted that bulk of the expenditure of the Ministry of Local Government and Provincial Councils is for salaries and other consumption expenditures (76% in 2009) of the provincial public servants, who were transferred from the national public services to the provincial public services when the provincial councils were set up in 1988. Currently, out of the 1.3 million public servants (including semigovernment employees), almost 300,000 are in the provincial services. Thus, only a small number of new recruitment was made directly to the provincial administrative services since 1988, Further, there were hardly any new buildings put up to house the provincial public administration in any province. Largely, the existing public buildings were used by the provincial councils or were hired from private property owners.
Therefore, there was hardly any additional public expenditure incurred due to the setting up of the provincial councils. It was a
45

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Table 2:
Provincial Finances - 2004
Share of
Provincia Public Sector Province Share of Employees 2002
Population 2004
Central 12.9 12.9
(2,506,000) (39,762) North Central 5.9 7.8
(1,145,000) (24,143) North East 13.7 15.8
(2,662,000) (48,643) North West 11.4 12.. O
(2,214,000) (36,949) Sabaraganuwa 9.4 8.8
(1,840,000) (27,044) Southern 2.1 3.5
(2,346,000) (41,628) Uva 6.3 7.3
(1,223,000) (22,523) Western 28.4 21.9
(5,526,000) (67,548) Sri Lanka OO.O OOO
(19,462,000) (308,240)
Source: Waidyasekera (2005), Decentralization and Pri Update, pp78:30-31; Department of Census and Statis Government Sector Employment 2002, Colombo.
mere transfer of public expenditure from the national to provincial level. In other words, suppose the provincial councils were to be abolished today, there would not be much savings on public expenditure because the provincial public servants have to be reabsorbed into the national public services.
Rationale for Fiscal Devolution
Fiscal decentralisation has gained nomentum in capitalist and communist/socialist countries (such as, China and Myanmar, for instance) and in unitary and federal States alike since the last quarter of the twentieth century. Country experiences have shown that fiscal decentralisation do enhance public goods and services delivery and poverty reduction (Ehtisham and Brosio, 2009). However, designing of fiscal decentralisation should be country-specific (Fedelino and TerMinassian, 2009). This author's case for fiscal devolution is not based on the dichotomy of unitary versus federal constitutional cum political models, but stems from the evolving business model globally towards subcontracting and
46
outsourcing the p. the supply chair 2009). Howeve: agrees that admir and fiscal decen panacea for eco (see, for e.g. Heuva
Public adminis effective when it people, which administration a revenue authorit higher the rev Therefore, the Revenue Depart Department decentralised. Th local inland rev departments sho collect direct a effectively at th public admin Information on and professions more effectively i of the inland re departments ra centralised depa Colombo.
The devolved go raising departm appropriate i

penalties for performance or
puincial Finance in Sri Lanka: 2004 An tics, Census of Public Sector and Semi
roduction line and n (Sarvananthan, r, not everyone histrative, political tralisation is the nomic efficiency vitharana, 1997).
tration is most is closer to the
apply to tax s well. Closer the ies to the people, 2nue collection. present Inland ment and Excise
should be us, provincial and enue and excise ould be set up to ld indirect taxes e lowest possible istration unit. local businesses could be gathered by the local offices venue and excise ther than by the rtments located in
vernment revenue ents should have ncentives and
Centra Share of lack thereof. Government Provincia 1 That is, the Grants to Revenue 2004 ဦy; (LKR million) government ouncils 2004 should Set (LKR million) annual target 14.4 7.9 of revenue at (5,764) (1,073) each level of 9.1 2.6 the devolved (3,514) (356) units of 6.6 O 6e W e r lu 6e (6,403) (141) mobilisation.
14.3 7.2
n I n cent i v e (5,533) (977) p a y n e n t S (a နို်ဝ်၊ (ဇံိုဒ်) should be paid 萤 7 7.6 to those units (5,286) (128) '
9.3 2.3 (3,596) 8– ់
ll. O 66.8 (4,236) (9,079) should be 1OOO OOO imposed to (38,472) (13,594) those units that fall short
of the target. By this way, the national government could incentivise the revenue collection at the provincial and local levels with rewards and penalties.
Financing the Post-War
Reconstruction
Government's avowed strategy for the economic revival of the conflict region is focused O physical(dwellings, roads, bridges, etc.), economic (electricity, water, telecommunications, railways,
etc.), and social (schools, hospitals, etc.) infrastructure development, which ae indispensable. However, this
author has serious reservations about the proposed financing of such infrastructure projects. Given the very tight fiscal space of the government as noted above, I do not think the government has adequate resources to finance such infrastructure development, because they are costly. Moreover, in the context of global financial crisis coupled with precarious external political relations of the present government, it is unlikely that the government will be able to mobilise adequate concessionary finance fron external donors (both
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Page 49
bilateral and multilateral). Infrastructure development is not a one-off capital expenditure. It has a recurrent expenditure in terms of the maintenance cost of such infrastructure for a long period of time.
In this scenario, the best option left for the government is to attract private capital (both domestic and overseas) for investinent in infrastructure in the former conflict-affected region and beyond under BOO (Build, Operate, and Own) or BOT (Build, Operate, and Transfer) modalities. The government's attempt to re-build the rail line beyond Vavuniya up to Kankesanthurai (in the Jaffna peninsula) is laudable, because the northern rail line (legendary Yarl Devi) used to be the highest revenue earner for the erstwhile Ceylon Government Railways (CGR) prior to its termination in the mid-1980s as a result of the civil war. Besides, rail transport is cheaper than road, ocean or air transport due to lower fuel cost per passenger, and the absence of traffic congestion and security checkpoints.
However, I do not think the government has sufficient financial resources to spend on this ambitious but worthwhile project. The government is explicitly appealing to the people for contributions, and Sri Lanka’s diplomatic missions abroad are organising "benefit show to mobilise finance from the diaspora, which are highly unlikely to yield desired results. According to the Central Bank Annual Report (2008), the Department of Railways incurred operating loss of Rs.12.5 million every single day during 2008 (annual loss was LKR 4,553 billion or approximately USD 43 million). Our suggestion is that, whilst the government could invest its own money as well as borrow from foreign donor/s to re-build the rail tracks and stations (infrastructure), it should open up the passenger transport to private capital (both domestic and foreign). That is, locomotives and rail cars/carriages could be invested, managed, and operated by the private sector. This kind of public-private partnership
- Economic Review: April/May 2011
could be the bes fiscal crunch
government. Alth government coul tracks and stati maintenance of til han ded- over tc
provincial goverr.
Similar public-pr for infrastructur the former confli could be explored fiscal space at th
Tax Reform Pro
Presently, incom based on self-ass the payee (eith corporate entit satisfactory. Ins should be collect - Pay As You E practically pos: compliance.
Tax reforns in SI based on streaml. the number of d taxes payable b corporations a taxes, and incre of individual taxpayers. That it base is the need than deepening tl and their rate: income tax oil employees and p) qua non for the v base. Public sec Sri Lanka are position, vis-a countries, becau not subjected to for instance, the sector employees forces personnel PAYE tax. Simila such as, doctors as well in ac government accountantS, and be brought unc scheme.
The foregoing pro best achieved taxation syst avoidance and
minimised by b

it way to beat the
faced by the ough the national d re-build the rail ions initially, the he same should be the respective
En6:ntS.
ivate partnerships e development in ict- affected areas amidst shrinking he national level.
»positions
e tax collection is sessment made by er individual or y), which is not stead income tax ed at source (PAYE arn) as much as sible to improve
i Lanka should be ining and reducing tirect and indirect y individuals and ld rates of such asing the number
and corporate s, widening the tax of the hour, rather he number of taxes s. Imposition of in public sector rofessionals is sire videning of the tax stor employees in
in an envious -vis most other se their income is PAYE tax. In India, : income of public (including armed ) is subjected to arly, professionals, (who work privately ldition to their job), lawyers, d teachers, should er the PAYE tax
ppositions could be under a devolved em where tax evasion could be eing closer to the
people. Bribery and corruption involved in tax evasion could also be minimised when the unit of surveillance is smaller and local. In post-war Sri Lanka, the national government should abdicate most of its functions and responsibilities to all nine provinces and local authorities, except monetary currency, defence, and foreign affairs. The national government's primary function should be regulator of the provincial and local governments und er a unified country, such as imposing a cap on provincial budget deficit. In order to fulfil its functions and responsibilities, provincial and local governments should be given fiscal autonomy. That is, the provinces and local governments should be vested with the powers to raise and earn income and spend on public goods and services within the respective province and local authority (municipal, urban and village councils). Each province should impose and collect taxes, except import duty and excise duty and value added tax on imports. Hence, the national government's revenue should primarily accrue from duties and taxes on international trade. Businesses within each province should register with and pay taxes (both direct and indirect) to their respective provincial government. Both the public and private sector employees within each province should pay income tax to their respective provincial government. At the same time, national government employees (such as the Central Bank staff, employees of the three armed forces, Ministry of Finance employees, and semigovernment employees) should pay income tax to the national government. Appropriate mechanism could be devised to share the consumption (indirect) and income (direct) taxes earned by
provinciali and governments with the national government. As a corollary, public utilities, such as, electricity, water, road and rail transport, etc., should be regionalised.
1 r s r.
the Vei
By providing fiscal autonomy to the provincial and local governments, the national government could
47

Page 50
promote competition among provinces and local authorities to attract businesses and
investments (both domestic and foreign). The fiscal space openedup (or envisaged) for the provinces and local authorities by the aforementioned method would create an environment for productive competition among provincial and local governments. The national government should do away with the nanny state it currently operates, vis-a-vis the provinces and local authorities, by way of providing annual grants to the provinces and local authorities based on various criteria. Present financial transfers from the centre to the provinces are barely adequate to pay for salaries, pensions, and re C.U. ret expenditures of the provinces. On the contrary, provinces should be encouraged to earn and spend their own money based on their priorities and decisions.
The foregoing propositions would require amendments to the present Constitution that could be incorporated in the upcoming overhaul of the Constitution by the present government. Alternatively, if there is no political or bureaucratic will to transfer fiscal powers to the provinces and local authorities, economic rationalism would suggest to abolish the Second provincial councils) and third (municipal, urban, and village councils) tiers of government despite the fact that the savings in public expenditure would be only small.
Conclusion
There is a lot of concern about the lop-sided economic growth and wealth concentration in Sri Lanka whereby the Western Province (Colombo, Gampaha, and Kalutara districts) accounts for almost half of the national Gross Domestic Product. There could be several causes for this concentration of economic output and wealth in just one province out of the total nine provinces in the country. The tax incidence or the source/s of tax revenue is one of the principal factors affecting income inequality among the population and the regional dispersion of economic
48
growth and weal system overwhelm consumption taxe concentrated in t wealthy individua and regions of th 1977, indirect or as a proportion revenue has incre time direct or i decreased. This primary causes production and people and place Moreover, the cq revenue and savin the provinces are t centre (part of W which promotes re. Therefore, giving provinces to retair consumption ta savings of til populations and proportion of the taxes in the total ta significantly disp income, and wealt away from the W Therefore, fisca proposed for inc. growth anong provinces as well conflict resolution
Although the Amendment to Constitution ha powers of revenue the provinces, it effective and effic to make the prov viable and m dependence on government. The past twenty tw. operation of the pr (1988-2010) h. monopolisation of national governm
The political esta Lanka and the psy at present appear of undertaking ra the political and architecture.
incremental devol be the pragmatic durable conflict I Lanka. Fiscal devic step in the incren process, could pr stronger governn support (than th

th. When a tax ingly depends on s, income will be he hands of the uls, institutions, e country. After consumption tax of the total tax ased at the same ncome tax has is one of the of the skewed wealth a mong s in Sri Lanka. )nsumption tax gs of people from ransferred to the estern Province) gional inequality. freedom to the l their respective x revenue and he respective increasing the direct or income ax revenue would erse production, th to the regions estern Province. l devolution is lusive equitable the different as a means of in Sri Lanka.
Thirteenth the Current S vested some e mobilisation to falls short of an ient mechanism inces financially inimise their the national tendency in the o years of the 'ovincial councils as been the taxation by the 5nt.
blishment of Sri che of the masses to be incapable dical changes to administrative Therefore, ution appears to way forward for resolution in Sri blution, one such hental devolution esumably attract ment and public Le devolution of
political and administrative powers) under the present unitarian government.
References:
Central Bank of Sri Lanka (2009). Annual Report 2009. Colombo. http:/ /www.cbsl.gov.lk/pics in docs/ 10 pub/docs/efr/annual report/ ar2009e/ar09 content 2009 e.htm
Department of Census and Statistics (2002). Census of Public Sector and Semi-Government Sector Employment 2002, Colombo.
Ehtisham, Ahmad and Giorgio Brosio (2009). (eds), , Does Decentralization Enhance Service Delivery and Pouerty Reduction P. Cheltenham (UK): Edward Elgar. Passim.
Fedelino, Annalisa and Teresa TerMinassian (2009). Macro Policy Lessons for a Sound Design of Fiscal Decentralization. July, Fiscal Affairs Department, Washington, DC: International Monetary Fund.
Finance Commission (2004). The, Annual Report 2004. Colombo.
Hewavitharana, Buddhadasa (1997). Economic Consequences of the Devolution Package and an Evaluation of Decentralisation. Colombo: Sinhala Weera Vidahana.
Sarvanaņthan, Muttukrishna, (2009). "Economic Freedon: the Path to Economic and Political Emancipation of the Conflict-Affected Region in Sri Lanka". PPID Working Paper Series, No.12, October, Point Pedro Institute of Development, Point Pedro. http:// p o in tp e dro . org/ images / W o r k in g P a p e r s ppid%20working%20paper%2012.pdf http : / / w w w . a c c o r d . o r g. za / downloads/ct/ct 2009 4.pdf
Waidyase kera, D. D.M. (2005). Decentralization and Prouincial Finance in Sri Lanka: 2004 - An Update. Research Studies: Governance Series No.8, November, Colombo: Institute of Policy Studies.
Footnotes
A speech given at the International Conference entitled Taking the Sri Lankan Peace Process Forward organised by the Observer Research Foundation in New Delhi on May 11, 200.
? Principal Researcher, Point Pedro Institute of Development, Point Pedro, Northern Province, Sri Lanka. http:/ A point pedro.org corrections, comments and suggestions are welcome to sarvia)pointpedro.org
Retired Prof. He wavitharana is currently an economic adviser to the President and Chairperson of the Institute of Policy Studies (IPS) of Sri Lanka.
Economic Review: April/May 2011

Page 51
BOOK REVIEW
Agriculture and Ru
Sri Lanka:
A Felicitation Volume in Hon
he recently published book,
"Agriculture and Rural
Development in Sri Lanka”, is a sequel of the untiring efforts of a group of academics in the Department of Economics at the University of Colombo and some of his friends outside the university who have been keen to pay tribute to their eminent colleague and friend, Prof. S.M.P. Senanayake for his vast academic contributions. Having an illustrious career as a dedicated university teacher and a formidable researcher, Prof. Senanayake has mostly concentrated on the issues relating to agriculture and rural development as reflected in his
numerous publications including
several books and monographs based on the ground realities.
In the face of economic liberalisation and globalisation, Sri Lanka's agricultural sector faces enormous challenges. This sector, once protected by stringent tariff and non-tariff barriers, has now been exposed to competition under the trade agreements with the World Trade Organisation (WTO) which provides legal ground rules for a free global trading system. In terms of the rules pertaining to the agricultural agreements, the member countries of the WTO are committed to formulate market-oriented policies with regard to market access, domestic support and export subsidies. These policies are meant to drastically curtail the protective policy measures that had been provided by the government to agriculture for several decades. In the backdrop of these marketoriented policy initiatives, the
foreign
question is wheth sector of Sri Lanl to face the glob Several papers address this crit volume also cove of current inte
economic dev agriculture, rura enterprises, food change and agriculture.
Global Challeng
G.M. Henegedar articulates the in global challenges, paddy-dominated which has a con
on food secur employment. Re partial and gen models, the aut though the production has inc this sector has effectively deal w of hunger, food ir inequity and disparities. Produ comparative dis labour product fragmentation are factors that inhi the food crop se need to implen policies to sustain the context of th negotiations is er article.
Saman Kelegama liberalisation C highlights t consequences of C of bulk tea in emphasises the r a long-term stra
- Economic Review: April/May 2011

ral Development in
our of Dr. S.M.P. Senanayake
er the agricultural ka has been able al competition. in this volume tical issue. This rs other themes erest including elopment and l farming, small security, climate non-plantation
a, in his paper, hplications of the focusing on the food crop sector siderable bearing ity and rural ferring to both bral equilibrium hor argues that idonestic food Creased over time, not been able to ith the problems security, income urban-rural ction inefficiency, advantage, low ivity and land some of the key pit the growth of ctor. Hence, the nent conducive small farming in ne evolving WTO nphasised in the
in his paper on of te a exports, he adverse :ontinuing export pure form. He need to formulate tegy to this vital
Reviewed by Prof. Sirimevan Colombage
Open University of Sri Lanka
industry in the face of rising cost of production and vulnerability of the local tea industry to international shocks. Raising value addition should be an important component of this long-term strategy. In this regard, promotion of blended tea production could play a vital role. Liberalisation of tea trade by allowing the manufacturers to import different types of tea will promote the tea blending industry and thereby enhance value-added tea exports. This will enable the country not only to regain some of her lost markets, but also to reduce the cost of production and to mitigate the adverse effects of domestic production fluctuations. Taking into account the sectorspecific and macroeconomic benefits, the author strongly recommends liberalisation of the
tea trade.
U.P.P. Serasinghe questions the effectiveness of the neo-liberal policies with regard to plantation agriculture in Sri Lanka. The author points out that the removal of State monopolies and technical provisions in line with the liberalisation have had adverse repercussions on the plantation agriculture. Various facilities given by the government to the plantation sector, such as, extension services and subsidised credit schemes, were withdrawn following the liberalisation. In the meantime, the agrarian service
49

Page 52
centres and commodity purchase department outlets were gradually closed down. The privatisation process was carried out based on the low efficiency and productivity arguments. Despite these reforms, the average yield and labour productivity of the plantation sector in Sri Lanka still remain well below those of the major foreign competitors. The author also argues that the new world trading order manifested by liberalisation and globalisation has not been favourable to countries like Sri
Lanka.
Deepthi Wickramasinghe examines the implications of climate changes on agriculture. Drawing evidence from the literature, the author points out that climate changes, such as, increased frequency of heat stress, droughts and floods, negatively affect crop yields and livestock. Climate variability also escalates the risks of fires, and pest and pathogen outbreaks, negatively affecting food production. Rising carbon dioxide levels, high temperature, shortage of water resources and extreme weather conditions are the major climaterelated factors that hinder agricultural development. The author points out that the corrective actions, such as, changes in crop patterns, effective use of water, fertiliser and pesticides, prudent irrigation systems and improved farmer adaptation strategies should be taken to OWe COe the adverse consequences of the climate changes.
Economic Development and Agriculture
Examining the future role of agriculture, Nimal Sandaratne emphasises that, irrespective of the declining share of agricultural production in the national output due to structural changes of the economy, this sector could still make a major contribution to economic development by way of
50
meeting the dome Acceleration of production will ease the balan difficulties, but a poverty, un em malnutrition.
contributions tha from plantation a unquestionable. the agricultural marked shi commercialised a part-time and
systems and us technologies. T crops, the farmi size of holdings. used and the
processing of cro be necessarily dif draws the attent makers to place on productivity research, better e and market facili
Siri Gamage revi development mod the needs of
countries. Each focused on differe development such free market m modernization. Ti how the interna governments a II thinkers influe countries to
direction and development unc undertakings.
instrumental in transferring deve knowledge, and I developing coun Gamage concil sustainable dev advocated by inte: have to be critica a developing cour as to judge hov autonomy, partici are included fron the end of develo the rural agricul
Bilesha Weerara Hasbe focus on dynamics with re

stic food demand. domestic food elp, not only to :e of payments so to reduce rural ployment and The positive could be derived griculture are also Development of sector calls for fts towards griculture, viable mixed-cropping e of productive he selection of ng practices, the the technology marketing and ps would have to erent. The author ion of the policy greater emphasis improvements, xtension services ties.
ews the evolving els in the light of the developing of these models ent dimensions of h as basic needs, le chanism and he author shows tional agencies, hd development nce developing determine the te Xtre Of erstandings and Such bodies are the process of opment thinking, elated funding to tries. Therefore, udes that the lopment models national agencies ly examined from try perspective so v much of local pation, and inputs the beginning to pment projects in ural sector.
tne and Takuya intergenerational gard to the choice
Economic Review: April/May 2011
of being a farmer. Using the microlevel data on rural investment climate, the authors find a significant impact of the first generation occupational choice of being farmers on the second generation individual being a farmer. However, such a clear relationship was not evident in the case of second generation effect on third generation individual being a farmer. It was also found that the third generation individuals' choice of being a farmer is greatly influenced by their grandparents being farmers. The authors attribute this empirical irregularity to the fact that the second generation is still active in the farm, while the third generation is still in an exploratory phase in terms of occupational choice. Based on these findings, they conclude that when parents are farmers, there is a high probability of the child to follow parents' footsteps, and therefore, agriculture is unlikely to lose its share in the labour force.
Rural Farming and Small Enterprises
S.P. Premaratne analyses the role of clusters and networks as a tool for development of small enterprises. It is noted that, individually, small enterprises have limited capacity to capture market opportunities due to their smallness and isolation. Clusters and networking could help them to O Ve TCO II e the se capacity constraints and to improve their competitiveness. A cluster, which is a group of firms located in a particular geographic area and working in the same industry, could engage in backward and forward linkages. A network is a collection of firms working in cooperation which are not necessarily in same place or in same industry. Networks could be developed within or out of clusters, and they could be eventually converted into a cluster. Both types of grouping could give small firms comparative advantages and collective efficiency benefits. Considering the severe shortage of resources among the small

Page 53
enterprises, the author argues that collective efforts in the form of clusters and networks must be encouraged.
J.A. Karunaratne puts forward the argument that rural areas are not disjointed from the urban regions as treated in the standard
but an component of the market economic system. This denotes a distinction between the feudal countryside and the capitalist rural economy, as much as there is a distinction
between the feudal town and the capitalist urbanity. The capitalist development is not merely a massive shift of human resources in favour of urban concentration, but it transformation of the countryside towards ruralisation. In effect, the countryside becomes the centre of production of agricultural and nonagricultural goods supplying food products and
definitions, integral
also involves 2.
industrial raw
materials. Karunaratne concludes that the process of transition from the feudal system to capitalism reflects a major paradigm shift with regard to the rural sector.
K. Amirthalingam and R.W.D.Lakshman, in their article on agricultural livelihoods and IDPS (Internally-Displaced Persons) in Sri Lanka, analyse how civil conflicts decimate agriculture. Using the household survey data gathered from selected conflictaffected areas in the country, the authors provide economic quantification of increased impoverishment risk resulted from displacement. The study reveals that IDPs have various coping strategies for their survival. Human capital on its own is of marginal use as a source of livelihood, and the physical capital assets and institutional structures are
essential to make use of human capital effectively. The study also reveals that different types of agricultural livelihoods respond differently to displacement.
Ranjith Bandar impact of the drip on the livelihood
farmers who be system in two dis data oollected f households. Bas of paired 't' tests. a positive relatior household incom drip irrigation observes certa. primarily in techn confidence buj communities in t of drip irrigation there is an u disseminate know stakeholders so
information gap. E attention of the
take appropriat regard in the next irrigation project,
Fredirck Abeyrat analyses the poverty and gov impact on the ag focusing on the sector. Despite contribution of a country's GDP { Product), employi exchange earning proportion of thos in agriculture Limitations, such of a consistent li mission, people's results-oriented dichotomy of extension, have re of the agricultur these governance place, investmer vill not cont1 alleviating the pov vast majority wh this enterprise. , that, in the cont attention on gov the prospects of sc related issues are
now than ever be
Food Securit Plantation Agri
W. G. Sonaratr extensive analys
Economic Review: April/May 2011

a examines the irrigation system of the small-scale nefited from this ricts by using the "om a sample of d on the results the author finds ship between the e and the use of However, he in deficiencies, ology delivery and lding in rural he current phase system. Hence, rgent need to ledge amongst all as to bridge the Bandara draws the policymakers to e action in this phase of the drip
ne, in his paper, nexus between ernance, and its gricultural sector non-plantation the significant griculture to the Gross Domestic ment, and foreign gs, a substantial e who are engaged remains poor. as, the absence ong-term vision/ participation, and strategy and the research and tarded the growth al sector. Unless parameters are in nt in agriculture ibute towards ferty status of the o are engaged in Abeyratne argues ext of worldwide fernance issues, lving governance2 more promising fore.
y and Nonculture
he presents an is of the factors
affecting the global food crisis and its impact on Sri Lankan agriculture with special reference to food security in the country. The author warns that the global food crisis will continue in the future, resulting in a further rise in the price of food to un precedente d levels in this century. Globally, demand for food is expected to escalate due to rapid economic growth in many developing countries, particularly in China and India. On the contrary, there will be a decline in food supply as a result of the unfavourable climate changes and the diversion of farm products to the production of biofuel as a substitute for fossil fuel. In the background of these adverse trends, the author stresses the critical role of government intervention in en su ring food security in Sri Lanka. The government needs to take a gamut of initiatives including investment in R8,D (Research and Development), supply chain development and management, marketing, public food delivery systems and value addition. High priority should also be given to . invest in rural infrastructure to provide an enabling environment for growth in the agricultural sector. Somaratne underscores that the government should recognise and support the role of different stakeholders, including the private Se C tOr and NGOS (NonGovernment Organisations), in the agricultural promotion drive.
Anura Ekain ayake deals with domestic agriculture and food security in his presentation. The paper begins with an outline of the instability of global food markets and their causes of instability including climate change. The paper cautions that a step change in food output occurred following the ethnic conflict does not necessarily guarantee a sustainable growth of food production in Sri Lanka to meet the growing food demand. Considering the adverse trends, such as, declining value added, slow productivity growth, low incomes and high poverty levels in the rural sector coupled with the declining
5.

Page 54
labour absorption, the author emphasises the need to change the food cultivation strategies. More productive farming practices, such as, higher levels of mechanisation, better post-harvest technology and cost effective storage facilities, should be encouraged so as to en han ce farm -- level returns. Ekanayake, however, notes that there is no reason to rely solely on one form of agriculture to suit the needs of Sri Lanka. As in many other sectors, an appropriate combination of small, medium and large entities will have to exist based on market conditions and other realities. The author concludes that the best approach would be to allow the markets to function and for any number of feasible models to emerge in keeping with the market dynamics will.
Rev. Wijitapure Wimalaratana thera analyses the role of the agricultural information system in promoting the food sector in Sri Lanka. The author points out that the
agriculture sector information, wh requirement for e of competitive m resulted in a co between the actu market signals. T of collection C
statistics lies
government al therefore, the
information systel is scattered and pC Allocation of t agriculture a1 ministries, dep organisations has the situation. The a centralised
agricultural infor as to facilitate n is emphasised in
Timely Publicati
Given the current by the agricultur midstofglobal con change, food productivity limit
Contd. from Diary of Events.....
14th The President Mahinda Rajapaksa declared the year commencing from Vesak Full Moon day 2011, as the 2600th Sri Sambuddhatva Jayanthi commemoration year' in the sacred city of Anuradhapura.
Singapore founding father, Lee Kuan Yew, resigned from the Cabinet, ceding leadership to a younger generation after his party's worst election result.
15* The President Mahinda Rajapaksa, by commemorating 2600th Sambuddhatva Jayanthi, declared open the newlyconstructed Sambuddhatva Jayanthi Mandiraya' at Havelock Road in Colombo and the road was renamed as Sanbuddhatva Jayanthi Mawatha.
The head of Britain's armed forces urged NATO to widen its bombing campaign as a revolt against Libya's regime entered its fourth month.
16. In the joint communique issued at the end of Sri Lanka External Affairs Minister Prof. G. L. Peiris's three-day visit to New Delhi, India has urged Sri Lanka to swiftly implement measures to ensure resettlement and genuine reconciliation, including early return of Internally-Displaced Persons (IDPs) to their respective homes, early withdrawal of emergency regulations, investigations into allegations of human rights violations, restoration of normalcy in affected areas and redress of humanitarian concerns of affected families.
17 Buddhists in Sri Lanka and other parts of the world celebrated the 2600th Sambuddhatva Jayanthi' on Vesak Full Moon Poya Day.
20. A newly-built International Buddhist Museum in Kandy was opened by the President Mahinda Rajapaksa to mark the "2600on Sambuddhathva Jayanthi”
52

lacks free flow of poverty, this volume is an ich is a basic appropriately-timed publication. As ficient operation discussed above, the volume deals rkets. This has with all these critical issues at this insiderable gap crucial juncture when the al and potential agricultural sector of the country is he responsibility at crossroads. It draws the f agricultural attention of the reader to the with different dismal performance of the sector in gencies, and spite of the policy reforms. This
agricultural calls for drastic changes in the n in the country current policy strategies. This orly coordinated.
volume is a fitting tribute to Ptof. he subject of S.M.P. Senanayake for his nong several enormous acadernic contributions : in the fields of rural development er fitis; and agriculture. I would like to take eed tO esta 1S this opportunity to congratulate the
and timely 4 «
o organising team led by Rev. nation system so −
V Wijitapure Wimalaratana thera for arket operations r.
painstakingly undertaking the the paper. -
mammoth task of compiling this lon valuable volume. I am confident that this will be an important challenges faced reference material to policymakers, 'al sector in the researchers, academics, students npetition, climate and to those who are interested in
insecurity the field in years to come. ations and rural
21 NATO staged an air strike near Muammar Gaddafi's compound in Tripoli.
North Sudanese army forces took control of the main town in the disputed Abyei region after fighting with its southern forces.
22. The death toll from a monster tornado that hit Joplin and Missouri in the USA rose to 123 while 750 people were injured and many more were reported missing.
23* The President Mahinda Rajapaksa inaugurated a threeweek residential training for new university entrants to develop their leadership abilities and positive thinking.
24 China said it would support the Sri Lankan government's efforts towards reconciliation, and indicated it would back the country against any international pressure following a recent, UN's report accusing the government regarding the war crimes.
26th Afgan President i Hamid Karzai condemned the US-led military operation that killed several people in troubled Northern Afganistan.
27. The second Victory-Day anniversary and tribute to war heroes was held at the Galle Face green, Colombo under the patronage of President Mahinda Rajapaksa.
30. The United Nations Human Rights Council (UNHRC) was commenced its 17th session in Geneva.
African and Islamic members of the 47-nation at the UNHRC moved to quell attempt made to reopen the debate on Sri Lanka's conduct at the end of the war using "Channel 4' video clip which was already rejected by the government of Sri Lanka.
Economic Review: April/May 2011 -

Page 55
|DARY OE
April
2". At least 35 people were killed due to floods and mudslides triggered by heavy rains in southern Thailand.
4th The International Monetary Fund (IMF) disbursed its seventh tranche of Sri Lanka Stand-By Arrangement (SBA) of SDR 137.8 million (approximately US dollars 218.3 million)
5 Turkey and Indonesia called for a ceasefire in Libya, and promised to help rebuild the country, as rebels and government forces battled for key eastern cities that are under the UN (United Nations) no-fly zone.
13 Sri Lanka's Ministry of External Affairs stated that the government has received a copy of the report of the UN Secretary General's Panel of Experts on alleging war crimes against Sri Lanka's political and military leadership (Darusman report),
16th The Afghan President Hamid Karzai and the visiting Pakistani Prime Minister Yusuf Raza Glani agreed in Afghan capital, Kabul, to boost joint efforts to make peace with the Taliban insurgents.
The World Bank and the International Monetary Fund, at their annual spring meetings in Washington, said that Middle East political turmoil needs to be closely watched lest it throws the global economic recovery off track.
18** The President Mahinda Rajapaksa visited Bangladesh on an invitation of the Bangladesh President Zia U1 Rahaman.
The Cardinal Malcolm Ranjith, Archbishop of Colombo said, a controversial report by a three-member UN Panel on accountability issues regarding the final stage of the war in Sri Lanka is part of a conspiracy against Sri Lanka.
The Asian Tribune reported that Portugal, Russia and China had strongly objected UN Secretary General's Experts Panel's report on war crimes of the last armed conflict in Sri Lanka, at its Security Council meeting.
19 Sri Lanka and Bangladesh signed five Memoranda of Understanding (MOUs) based on mutual cooperation to develop and expand trade, fisheries, agriculture, vocational education , science and culture of the two countries, following official talks held between the Sri Lanka President Mahinda Rajapaksa and the Bangladeshi Prime Minister Sheikh Hasina Wazed in Dhaka.
20 Tens of thousands of protesters again hit the streets across Yeman to urge President Ali Abdullah Saleh to step down. The President said he would “resist” calls to resign.
2. The External Affairs Minister Professor G.L.Peiris said that the government strongly objects the publication of the report of the UN Secretary General's Panel of Experts on war crimes of the last armed conflict in Sri Lanka and for taking of measures based on the recommendations made by the panel since the panel is not appointed according to the UN system.
Japan banned people going within 20 km of the tsunami-hit Fukushima nuclear plant, which has been leaking radiation.
Russian Foreign Minister Sergei Lavrov warned against a Western ground operation in Libya, saying it would be an "extremely risky" action with unpredictable consequences.
26 Navi Pillay, the United Nations human rights chief, urged further investigations into the reports of war crimes in the last armed conflict in Sri Lanka.
The Sri Lanka government again rejected the 'Darusman Report after it was published by the UN.
- Economic Review: April/May 2011

EVENTS
Russian Prime Minister Vladimir Putin criticised NATO (North Atlantic Treaty Organisation) over its military intervention in Libya, saying the West has violated the UN mandate by trying to kill Libyan ruler Muammar Gaddafi.
27th The Sri Lanka government reiterated its position that the 'Darusman Report' is fundamentally flawed in many respects, while the report is based on biased material, which is presented without any verification.
28 Associated Press (AP) reported that over 300 people across six States in the United States of America (USA) died in the worst tornadoes.
30th Chinese Foreign Ministry spokesman Hong Lei said that China believes the Sri Lankan government and people will handle properly problems regarding its war and called upon the international community not to complicate the issue.
May
1* The Libyan government announced that Saif al-Arab, the youngest son of Muammar Gaddafi, and three grandchildren of the Libyan leader were killed in a NATO airstrike.
2" The United State's (US) Assistant Secretary of State incharge of South and Central Asian Affairs, Robert O' Blake visited Sri Lanka.
US media reported that the mastermind of September 11th, 2001 terrorist attacks in the USA and the world's most wanted terrorist Osama bin Laden was killed by US forces in Pakistan.
3. The Russian Ambassador to Sri Lanka Vladimir Mikhaylov said that he was surprised by the language used in the UN Expert panel report and the baseless allegations of it on the part of Sri Lanka.
The External Affairs Minister Prof. G.L. Peiris said in parliament that Sri Lanka will send a detailed response on the controversial
Darusman Report to United Nations Secretary General, Ban ki Moon.
4. The US Assistant Secretary of State, Robert O'Blake declared in Colombo that Velupillai Prabhakaran and Osama bin Laden were two of the most ruthless terrorist leaders in the world.
Parliament members and lawyers of Pakistan condemned the US for 'violating Pakistan's sovereignty by carrying out a military operation without awareness of Pakistan to kill Al-Qaeda leader Osama bin Laden.
5 China criticised the US for violating Pakistan's sovereignty
by carrying out a military operation to kill Al-Qaeda leader Osama bin Laden.
6. The Maldives government opposed the controversial Darusman Report issued by a panel appointed by the UN Secretary General without approval from the UN body.
11** The UN Secretary-General Ban Ki-moon called for an “immediate, verifiable ceasefire" in Libya where rebels are fighting to end Muammar Gaddafi's 41-year regime.
Russia backed the USA's right to hunt down and kill Al-Qaeda Chief Osama bin Laden as Russian leaders prepared to hold talks with visiting Pakistani President Asif Ali Zardari.
12. The European Parliament called on Sri Lanka government to implement the recommendations of the UN panel of experts on alleging war crimes and conduct a genuine investigation.
13. The Amnesty International has called attention to failing
human rights record of the US due to its use of flewed detention and execution systems.
Contd. on page 52
53

Page 56
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