If the right infrastructure is not in place or not properly designed, the integration, interconnectedness and complexity in the global financial system may hamper the health of the local financial system as economies become exposed to external shocks and crises, not only generated in the countries that directly relate to them, but also through contagion effects. Therefore, the main challenge for countries like us is managing financial globalisation in such a way that we take full advantage  BIS central bankers’ speeches  3  of the opportunities it generates while minimising its adverse impact on the domestic financial sector by properly putting in place the right infrastructure. Reason 3: Avoidance of any possible financial distress Ladies and gentlemen, our financial system has also experienced a few non-systemic financial distresses in the past mainly due to the companies’ own mismanagement practices including poor credit management, non-viable investments made in their group of companies, unsatisfactory accounting systems and revenue recognition practices, inadequate internal controls, and high volume of related party transactions. However, some financial institutions have failed due to reasons such as their inability to adapt to the rapidly changing economic conditions. Small financial institutions not complying with corporate governance principles, capital and liquidity requirements were also a reason for some past crises, which have resulted in exerting pressure on the stability of the financial system of the country. During 1988–90, 13 Licensed Finance Companies reported serious distress, of which 2 companies were revived by infusing new capital while 11 companies were liquidated.

Step 1: Initiation of financial sector consolidation The Central Bank initiated the planning of the consolidation programme several years ago, and since then, a number of things have been done to bring it into reality, with procedures being carefully articulated for smoother implementation. As a result, in 2013, the Central Bank officially informed the Ministry of Finance, through a Budget Proposal, of the need for a strong and dynamic financial sector, by consolidating the institutions in the banking and nonbanking sectors in a prudent manner to ensure enhanced financial system stability and to spearhead economic growth. To support this initiative, His Excellency the President, in his Budget Speech on 21 November 2013, proposed to grant special tax concessions for expenditure incurred by banks and NBFIs, if they merge with, or acquire one or more financial institutions. Further, in view of providing better financial services for the development activity of the country, His Excellency proposed that two development banks, that is, NDB and DFCC be merged, for which too, qualifying payment status would be granted. Ladies and gentlemen, as the Central Bank is charged with the duty of securing financial system stability by its mandate, the major responsibility of implementing the consolidation programme announced by His Excellency the President was entrusted to the Central Bank. Further, in order to meet the funding requirements for the implementation of the consolidation programme, the Monetary Board approved a budgetary allocation from the Central Bank.