In formulating a consolidation model for Sri Lanka, we studied several consolidation models of other countries, as they were useful for us to fashion our programme in an effective manner. In Asia, following the Asian financial crisis, many countries consolidated their financial institutions successfully. However, in the Western countries, mergers and acquisitions in the financial sector were largely one-off, market driven arrangements, and no consolidation was recorded as a pre-emptive national policy even after the series of crises reported in their financial sectors. Let me highlight a few success stories of financial sector consolidation that have taken place in the Asian region. BIS central bankers’ speeches  7  Malaysia: Following the Asian financial crisis in 1997, Malaysia realised the necessity of having a strong and resilient financial system and accordingly initiated a merger programme to consolidate the financial sector. Within one year of the merger programme, the non-bank sector was strengthened and the number of NBFIs was reduced from 39 to 8. By 2000, 50 out of 54 banking institutions were consolidated into 10 banking groups and as of today, all finance companies have been merged with commercial banks. Successful reforms of the financial sector have further reinforced the strong fundamentals supporting a sound financial sector in Malaysia. It was observed that overall confidence and stability in the Malaysian financial sector was preserved during the recent global financial crisis underpinned by a strong and well regulated financial sector.

Accordingly, the Monetary Law Act together with the subsequent enactments of the Banking Act and the Finance Business Act have empowered the Monetary Board to issue Regulations and Directions to the banking and NBFI sectors with a view to ensuring financial sector soundness, protecting the financial institutions from any mismanagement and failures, and maintaining public confidence. Hence, I believe you can understand that the Central Bank has a pivotal role to play in steering this consolidation process in line with its key objectives and responsibilities as the policymaker and the regulator of the financial system of the country. In this regard, the Central Bank’s role in the financial sector consolidation process will be that of a pragmatic systemic risk mitigator, and a guide that encourages innovation in order to ensure the overall goal of financial system stability. The Central Bank’s policies are forward looking and designed to balance global policies and adjust to sudden volatilities, and to preempt, as much as possible, any possible financial distress or any possible failures in the financial sector in the future. Within this scope, the regulatory framework will be further  6  BIS central bankers’ speeches  improved to promote competition, develop sound and effective institutions, enhance operational aspects including IT and payment infrastructure, and foster a culture of innovation in the financial sector, thereby strengthening and maintaining financial system stability. Basis 2: Evolution of the financial system of Sri Lanka Ladies and gentlemen, now I would like to briefly take you through the evolution of our financial system.