Sri Lanka’s financial sector expanded and strengthened playing a key role in supporting the growth momentum of the economy. Despite challenging global as well as domestic market conditions, the risk absorbency capacity and the overall soundness of the financial sector improved with higher levels of capital, adequate liquidity buffers, healthy earnings, enhanced supervisory and regulatory frameworks and integrated risk management frameworks, stated Central Bank presenting its Financial System Stability Review.

Further, public confidence improved with financial safety net mechanisms and consumer protection measures in place. Although asset growth moderated responding to the ceiling on credit growth in force during the year, access to finance increased with the extension of branch networks specifically in the regional areas, the report said.

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

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

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

With a view to improving transparency and reliability of financial reporting of the financial institutions, accounting standards in line with international financial reporting standards were adopted in 2012.

Solvency margin rules were further strengthened and initial measures are being taken to introduce a risk based capital adequacy framework for the insurance sector. The close monitoring and proactive risk management practices have ensured reliability and smooth operations of the payment and settlement systems in the country.