During the period 1986–1988, several finance companies showed some distress due to mismanagement of funds. This required the Central Bank to bring in swift reforms to maintain overall stability and efficiency of the companies in the non-bank financial sector of Sri Lanka. Accordingly, the Finance Companies Act, No. 78 of 1988 was enacted and the Department of Supervision of Non-Bank Financial Institutions was established at the Central Bank in late 1988. However, with the continuous and rapid development in the NBFI sector, the regulations effected by the 1988 Act became futile, despite the amendments made in 1991. Ambiguities in the supervisory powers in respect of the Licensed Finance Companies and inadequate regulatory framework to deter unauthorised deposit taking persons and institutions that existed in the Act compelled the Authorities to introduce a more effective legislation. Accordingly, Finance Business Act, No. 42 of 2011 was enacted addressing all prevalent concerns and lacunas of the Finance Companies Act. With regard to the banking sector, the Banking Act was also amended from time to time, inter-alia, to introduce more prudential standards such as the amendments made in 1990, 1995, 2005 and 2006. These banking laws and regulations are regularly updated in line with the best practices in the industry, both locally and internationally, covering requirements, principles and guidelines issued by the “Basel Committee for Banking Supervision” of the Bank for International Settlements (BIS). Basis 3: International experience on financial sector consolidation Ladies and gentlemen, I would like to share with you the global experiences of financial sector consolidation.

Meanwhile, smaller foreign banks are expected to develop new strategies to grow, and to increase participation in the domestic economic activity through expansion of the necessary skills and product development thereby enhancing their value addition in the economy. Non-bank financial institution sector One of the objectives of the consolidation plan is to fashion out an NBFI sector that comprises of a smaller number of strong NBFIs, which are fully compliant with the Central Bank’s regulatory framework. On completion of the consolidation, we expect about 20 standalone NBFIs, of which at least 3 would specialise in microfinance business, and each NBFI would own an asset base of over Rs. 20 billion by 2016. Although there has been some criticism that this would lead to an oligopolistic market where lending rates would be high while deposit rates would be low, the post consolidation NBFI sector with the increased quality and quantity of capital is expected to have improved loss absorbency capabilities and enhanced resilience to internal and external shocks, and with such improvements, these NBFIs will be able to attract low cost, long term funds from the market in the form of deposits and debt. Further, in order to be competitive, NBFIs have to improve cost efficiencies, diversify their businesses, be ready to deal with market volatilities, and be able to manage risks in an integrated manner. Finally, following the consolidation, NBFIs are expected to have improved governance and fit and proper management teams capable of running the entities efficiently and competitively.