Changing financial systems in open economies: Sri Lanka's experience

tions of an independent developing nation. In this context, as in other developing countries, an important function of the Government and the CBSL was to promote the development of the country’s financial system. In the 1960s and 1970s, the major emphasis was on localising and expanding the financial system into remote areas with state support and participation. The Government intervened in the financial sector directly by establishing new public sector financial institutions and introducing new regulations and controls on financial sector activities. Consequently, the banking sector, until then dominated by expatriate banks which mainly met the financial requirements of the foreign trade sector and the need for working capital of the plantation sector, underwent a radical change as local state banks instead gained the dominant position in the financial system. The state banks continuously increased their relative share in the banking sector by extending their services into new economic sectors and into the remote areas of the country. Meanwhile, there was little or no private sector involvement in financial activities during this period. The private sector was even restricted in taking up or expanding business in particular areas of the financial services industry, which created a public sector monopoly in these segments of the financial sector.