The Central Bank of Sri Lanka, established in 1949, began operations in 1950 with a capital of R 15 million contributed by the government. The sole bank of issue, it administers and regulates the country's monetary and banking systems.
Although Sri Lanka has a fairly well diversified banking system, the two largest banks, the Bank of Ceylon and Peoples Bank, are state owned and operate inefficiently. They are considered to be incompetent, primarily owing to excessive government influence in their lending operations and overstaffing. The World Bank has identified the dominance of these two banks as a major constraint on the development of the financial sector. The simple solution, privatization, is not an option given the current political climate. Together, they accounted for two-thirds of commercial bank deposits in 1999.
In addition to the central bank and the two state owned banks, there are 9 private domestic commercial banks, 14 foreign banks, a national savings bank, 6 regional rural development banks, 2 large development finance institutions, a mortgage bank, and 13 merchant banks. US banks operating in Sri Lanka include Citibank and American Express. The International Monetary Fund reports that in 2001, currency and demand deposits—an aggregate commonly known as M1—were equal to $1.4 billion. In that same year, M2—an aggregate equal to M1 plus savings deposits, small time deposits, and money market mutual funds— was $6.1 billion. The money market rate, the rate at which financial institutions lend to one another in the short term, was 21.24%.
The Colombo's Brokers Association operates an organized stock market, whose transactions have grown significantly since the 1984 tea export boom increased liquidity in the economy. The Colombo Stock Exchange was established by the Association of Stock Brokers in 1987 and has established itself as one of the most efficient in the region. In 2001, there were 238 companies listed on the exchange with a combined market capitalization of $1.3 billion. The turnover ratio was 13.2%. The exchange was adversely affected by the pull out of foreign investors from the region after the nuclear tests in India and Pakistan. The market was also affected by the Asian economic crisis and the Russian financial crisis, suffering a 14% decline in 1998 and a 26% decline in 2000. The CSE Milanka was up 47.6% in 2001, at 1,031.