Effects of Civil War on the Financial Intermediation in Sri Lanka: Possible ill-effects on interest spreads, credit and bank branch network.

Abstract

Despite remarkable developments that took place in recent decades, Sri Lankan banking system has failed to achieve its true potential. The size of the banking system relative to GDP, for example, remains low and declining overtime in contrast to growing banking systems in other countries like India. Drawing upon the experiences in recent decades this paper argues that prolonged civil war has deprived Sri Lankan banking system from attaining its potential growth. Further, the findings show how the banking system has achieved rapid expansions during relatively peaceful time periods and immediately after ending of the civil war. The discussions provide explanations on why banking systems in some countries endowed with advanced financial infrastructures and substantially higher interest spreads have failed to expand sufficiently.